Description
This study aimed to identify the role of the management accountant in evaluating the companies' performance through using the financial analysis methods in evaluating the performance of the National Chlorine industries co.ltd.
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The Role of Financial Analysis Ratio in Evaluating Performance
(Case Study: National Chlorine industry)
Abdel- Rahman kh. El- Dalabeeh
Accounting Department, Faculty of Finance and Business Administration, AL al-bayt University,
Mafraq, Jordan
Abstract
This study aimed to identify the role of the management accountant in evaluating the
companies’ performance through using the financial analysis methods in evaluating the
performance of the National Chlorine industries co.ltd. The analytical approach, which is
based on the analysis of the financial statements for five years except 2003 , was adopted in
this study and the Horizontal Analysis ,Vertical Analysis and Financial Ratios, which were
the most common between 2003-2008, were applied. The study concluded that having an
administrator accountant to analyze the financial statements of the National Chlorine
industries co.ltd leads to identify and explain the deviations and the undesired extreme results.
And through training the employees, it is possible to use other methods to analyze the
deviations that help in evaluating the company through identifying the causes for these
deviations. The researcher recommended establishing an independent department for the
management accounting in the company to evaluate its performance through analyzing the
deviations and treat them and to provide qualified employees; scientifically and practically to
do the work of the company.
Keywords: Role ; Financial Analysis Ratio ; Evaluating Performance ; National Chlorine
industry
1. Introduction:
The management accounting is considered one of the most important components of the
system of the administrative information in the company by providing the economic and
financial information and collecting information taken from other systems of information in
the company so it looks as accounting for inner affairs that helps the administration in
making decisions ,planning , controlling and evaluating the performance of the company’s
activities , therefore it is not restricted to the known accounting principles but it depends on
basis and regulations concerning the content and the shape of the inner reports
1
.
And due to the competition circumstances between the projects for the resources and the
markets in the local and international levels, the importance of using the methods of
accounting arose in studying the historical and economic data to estimate the revenues and the
appropriate costs of these decisions , and the management accounting role is to find solutions
to these deviations in order to avoid them in future , and develop the company to achieve
higher revenues and to have a place in the competitive market
2
.
1
Meri`, Ateia( 2008),Management Accounting : Basics of planning , making decisions ,controlling and
evaluating the performance , Dar Alfath Atajleed Alfani, Alexandria
2
Previous reference ,p 12.
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1.1 The problem of the study:
The Industrial Corporations are considered distinguished companies in Jordan, and one of
these companies is the National Chlorine industries co.ltd which tried to do its work
properly through reducing the deviations to achieve its final target which is achieving high
profits. The problem of the study is represented by answering the following questions:
What is the management accounting role in evaluating the performance of the National
Chlorine industries co.ltd through using the methods of financial analysis (Horizontal
Analysis ,Vertical Analysis and Financial Ratios) ?
1.2 Objectives of the study:
This study aims to achieve the following objectives:
1- To identify the role of management accounting in evaluating the performance of
the National Chlorine industries co.ltd by using Vertical Analysis Method?
2- To identify the role of the management accounting in evaluating the performance
of the National Chlorine industries co.ltd by using Horizontal Analysis Method?
3- To identify the role of the management accounting in evaluating the performance
of the National Chlorine industries co.ltd by using Financial Ratios ?
1.3 Significance of the study
The importance of using the financial analysis methods in the National Chlorine industries
co.ltd is represented by providing the appropriate and accurate information to know the
reasons of the deviations and then to evaluate the company’s performance .
2. Conceptual Framework and Previous Studies
2.1 An Introduction about the National Chlorine industries co. ltd
The National Chlorine industries co.ltd was established as limited public shareholding
company by the law of companies N(1) to the year 1989 and registered in the record of the
limited public shareholding companies under N( 212) in 09/11/1991 and in 15/03/1992 the
company has the right to start working . The company established its factories in Mowager,
the southern area of the east of Amman. One of the company’s goals is to establish a
factory to produce Chlorine and caustic soda and their products, to buy raw materials,
machines, necessary tools to achieve their goals in addition to sell, market the company’s
products and distribute them locally or export them abroad. The main Market of liquid
caustic soda’s product is in Jordan and its estimated volume of internal sales to Jordan is
about (85%-90%) of Soda production and what remains is sold to Syria, Lebanon, and Iraq.
While Jordan share’s of Chlorine gas does not exceed (25%) of the production and what
remains is exported to Iraq, Syria and Lebanon.The National Chlorine industries co.ltd is
exposed to an external competition of Kuwaiti, Saudi and Egyptian products which have a
whole custom exemption in Jordan where the companies , most of times, lowered their
prices than at cost.
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2.2 Methods of Management Accounting
The system of administrative accounting is considered the most important component of
the administration information system in the project because it supplies the economic and
financial information and do all the work of other branches of information system of the
project and the main purpose of these processes which the system of administrative
accounting does is to prepare the reports that include the necessary information for planning ,
controlling and evaluating the performance in order to take the appropriate decisions
3
.
Meri` defined the administrative accounting as “ It is an information system that collect
and analyze data concerning useful issues , or phenomena , or economic phenomena in the
field of information production help in taking decisions that have economic effect on the
resources, the economic projects’ commitment and the society fortune as a whole unit. And
this information could be happened in the past or in the present and it is expected to last till
near future or it is expected to happen in the future and it has no relation with past or present.
4
And Abu Alhasan, defined management accounting as “Information system specialized in
collecting, analyzing, classifying and storing basic data or information resulted from other
systems of information in the company to produce information which are naturally
quantitative financially or non financially, then they are presented to the higher administration
to use them in planning, taking decisions and controlling the plans’ implementation”.
5
And regarding the importance of the administrative accounting in serving the employees of
the company, its objectives from Hilton’s point of view is
6
: “provide information for the sake
of planning processes and making decisions, help the managers in guiding and controlling the
operative activities and motivate the mangers and other employees, measure the performance,
units, managers and the employees who work in the company and improve the company’s
competitive situation”.
2.3 Performance Evaluation:
The performance evaluation is considered as the final step in a series of the administrative
process where the administrative process starts by identifying the desired objectives as a result
of utilizing the available resources to the administrative unit, then a plan is prepared to achieve
these objectives followed by the control process over the implementation in order to identify
the deviations of the actual results of what the plan and the objectives identified as expected
results and the control process leads the evaluation process.
3
Abo-Hasan,Ali,(1996) Advanced Management Accounting ,1
st
ed, Dar Jamea, Alexandria
4
Meri`, Ateia( 2008),Management Accounting : Basics of planning , making decisions ,controlling and
evaluating the performance , Dar Alfath Atajleed Alfani, Alexandriap 11
5
Abo-Hasan,Ali,(1996) Advanced Management Accounting ,1
st
ed, Dar Jamea, Alexandria
6
Hilton, R.( 2002). Managerial Accounting ,p6
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The process of evaluation is the most difficult administrative tasks because it includes many
different variables, some are descriptive and others are personal and because of this, it seems
difficult to measure the performance. But having standards for evaluating the performance
means the availability of a physical measurement could be applied for the individuals. The
standards provide an effective model for evaluating the performance
7
. And evaluating the
performance is one of the systematic control steps of the costs and these costs include the
following :
8
1- Preparing the approach : this step is done at the level of planning
2- The control: this step starts at the beginning of the implementation level and
continues till the actual implementation level is over. And in this level the
performance is evaluated in terms of the comparison between the authorized
standards of planning level and the results of the actual performance and
implementation.
3- The judgment: to evaluate to the performance and identify the level of the
efficient productivity.
4- The treatment: writing a report of the urgent deviations and their causes to
decisions as a treatment for them.
2.4 Evaluation the financial performance:
The financial evaluation performance has a big importance in world of economy and it was
what the studies of accounting and administration focused greatly on.
The financial reports which are prepared in the company is considered as an important tool to
evaluate the financial performance where analyzing these reports helps in identifying the
company’s points of weakness and strength and work on the weakness to find solutions. The
financial ratio is the most common method used to analyze the financial reports and has an
accurate evaluation to treat the points of weakness, effectively and efficiently. The financial
ratios do not add new information but it is helpful in explaining the relation between the
variables to come up with results.
2.5 Previous studies:
1- The study of Abdallah (2008)
9
aimed to identify whether the Jordanian industrial
companies applied the modern management accounting and to identify the most
important benefits the companies get from these methods . The results of the study
showed that the most important benefits of applying these methods is providing the
administrations with the appropriate information in appropriate time, improving the
products’ quality and reducing the costs.
2- The study of Emsley
10
aimed to clarify how the management accounting can design
an analysis to the deviations to solve the problems at the level of operations. A case
7
- Hetger, Listrai& Matoltch, Seirj( 1988) , management Accounting , translation Hajaj, Ahmad, Ryadh , Saudia
8
Kahala, Jebrael& Hanan,Radwan,(1998) Standard cost accounting : control and proof, 2
nd
, Dar Athagafa for
publishing and distribution , Amman , Jordan .
9
Abdallah, Ali(2008) , Financial Analysis and its uses for controlling the performance and revealing the
deviations , Unpublished thesis , University of Open Arab Academy , Denmark
10
Emsley, David(2001). Redesigning Variance Analysis for Problem solving .http://papers.ssrn.com/sol3/papers.cfm?abstract_id=261182
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study was used to describe a number of improvements inserted into solving the
practical problems in the company including changes in the system as the analysis
deviation after discussing these improvement in group work. The study concentrated
on four changes affect the deviation analysis and suggested four improvements. The
results showed that three of these suggestions improved problem solution .
3- The study of Al-Hadidi(2005)
11
aimed to identify the extent of using the methods of
management accounting by the Jordanian public industrial companies in the field of
taking decisions, controlling and planning and it also aimed to reveal the degree of
variance between applying these methods and the financial performance of these
companies and to identify the difficulties which they faced using the management
accounting methods in these companies . It was found that the common method used
in taking decisions is the total cost , in planning is the operational budgets while in
the control , the most common methods used is the comparison with the previous years
, responsibility accounting , performance reports and calculating the deviations. The
least methods used in making decisions is the system of Activity-Based Costing and in
the control is balance score card.
3. Methods of collecting data
For the purpose of collecting data , the researcher depends on the following methods:
-Arabic and foreign Books, journals and other references which addressed the topic of the
financial analysis and evaluating the performance were considered as the basic reference
for the theoretical information about the topic of this study.
- And regarding the information of the applicable side , the researcher depends on the
financial reports of the National Chlorine industries co.ltd with the help of Securities
Commission-Amman-Jordan.
3.1Financial and Statistical methods used in the analysis:
There are many financial and statistical methods used in this research as:
1- Financial ratios as liquidity and profitability ratios.
2- Vertical and horizontal analysis of the financial statements
11
Al-Hadidi ,Isra`,(2005). Extent of using methods of management accounting in the Jordanian public industrial
companies and their effect on the performance , Unpublished thesis, University of Jordan, Amman Jordan
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Table (1)
Balance Sheet (2003-2008)
2008 2007 2006 2005 2004 2003 Assets
Current assets
1,444,150 361,725 616,591 71,754 25,834 3,069 Cash on hand and at bank
1,805,489 2,149,889 1,651,440 1,993,513 1,638,583 1,688,573 Accounts receivable
23,380 41,204 110,837 113,524 136,434 39,874 Documentary credits
160,453 159,891 126,794 163,321 82,284 176,654 Checks Under Collection
0 0 0 0 0 0 Short term loan
376,820 333,399 167,524 164,304 142,320 271,829 Goods
1,079,681 1,029,211 1,148,779 1,195,539 873,624 802,209
Warehouse, chemicals and
spare parts
4,889,973 4,075,319 3,821,965 3,701,955 2,899,079 2,982,208 Total of current assets
0 0 0 0 0 0 Long term investment
6,869,638 7,822,942 8,503,652 9,543,921 10,725,450 12,148,568 Net fixed assets
0 0 0 0 0 0 Lands
377,312 72,081 0 0 0 0 projects under execution
7,246,950 7,895,023 8,503,652 9,543,921 10,725,450 12,148,568 Total of fixed assets
0 0 0 0 0 0 Other assets
12,136,923 11,970,342 12,325,617 13,245,876 13,624,529 15,130,776 Total of assets
Liabilities and equity
Current liabilities
538,833 602,868 606,828 625,487 745,720 1,500,842 Accounts payable
55,486 102,221 34,206 527,210 1,063,541 1,798,743 Credit banks
0 0 0 0 0 0 Short term loan
0 0 73,518 153,276 708,998 710,000
Current portion of long-term
loans
338,451 400,297 465,076 421,508 414,569 239,773 other credit balances
932,770 1,105,386 1,179,628 1,727,481 2,932,828 4,249,358 Total of current liabilities
0 0 0 62,652 0 710,000 Long term loans
0 0 0 0 0 0 Corporate Bonds
932,770 1,105,386 1,179,628 1,790,133 2,932,828 4,959,358 Liabilities total
Equity
9,000,000 9,000,000 9,000,000 9,000,000 9,000,000 7,200,000 Capital authorized
9,000,000 9,000,000 9,000,000 9,000,000 9,000,000 7,200,000 Capital, subscribed
9,000,000 9,000,000 9,000,000 9,000,000 9,000,000 7,200,000 Capital paid in
1,013,922 894,282 822,639 708,136 529,001 433,054 Compulsory reserve
250,674 410,580 410,579 360,579 260,579 260,579 optional reserve
0 0 0 0 0 0 Other reserves
0 0 0 0 0 1,350,000 Premium issue
0 0 0 0 0 0 Discount issuance
0 0 0 0 0 0 Treasure stock
0 0 0 0 0 0 Fair value total change,
939,557 560,094 912,771 1,387,028 902,121 927,785 profits forwarded profits
11,204,153 10,864,956 11,145,989 11,455,743 10,691,701 10,171,418 Total of equity ,stockholders
0 0 0 0 Minority rights
12,136,923 11,970,342 12,325,617 13,245,876 13,624,529 15,130,776
Total of equity ,stockholders
& liabilities
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Table (2)
Income list for(2008-2003)
2008 2007 2006 2005 2004 2003
8,905,038 6,288,605 6,732,370 8,127,405 7,064,271 6,822,646 Sales
6,221,747 4,706,025 4,945,646 5,316,833 5,269,848 4,995,471 Cost of sales
2,683,291 1,582,580 1,786,724 2,810,572 1,794,423 1,827,175 Gross Profit
431,777 350,900 372,966 325,549 327,506 242,622
General &
Administrative
Expenses
1,101,547 558,133 508,705 534,028 367,545 272,323 Selling expenses
7,745 8,695 49,428 102,796 158,270 269,074 Financial expenses
1,142,222 664,852 855,625 1,848,199 941,102 1,043,156 Net operating income
54,176 51,577 325,792 9,295 79,424 122,073
Net Revenue &other
expenses
98,151 66,433 95,167 138,780 120,804 98,872
Expenses &other
expenses
1,098,247 649,996 1,086,250 1,718,714 899,722 1,066,357
Profit, year before
tax provision
1,098,247 649,996 1,086,250 1,718,714 899,722 1,066,357 Net income b.tax
13,924 31,033 46,004 54,672 19,439 18,660 Income tax provision
25,126 0 0 0 0 0
Income tax, previous
years
1,059,197 618,963 1,040,246 1,664,042 880,283 1,047,697 Year, profit
0 0 0 0 0 0 Minority rights
1,059,197 618,963 1,040,246 1,664,042 880,283 1,047,697
Net income of
shareholder
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Table (3)
Analysis of financial reports
(Horizontal analysis of balance sheet
2003 - 2004 2003 - 2005 2003 - 2006 2003 - 2007 2003 - 2008 Assets
Current assets
841.77 2338.03 20090.94 11786.41 47056.04
Cash on hand and
at bank
97.04 118.06 97.80 127.32 106.92
Accounts
receivable
342.16 284.71 277.97 103.34 58.63
Documentary
credits
46.58 92.45 71.78 90.51 90.83
Checks Under
Collection
Short term
investment
52.36 60.44 61.63 122.65 138.62 Goods
108.90 149.03 143.20 128.30 134.59
Warehouse,
chemicals and
spare parts
97.21 124.13 128.16 136.65 163.97
total of current
assets
0.00 0.00 0.00 0.00 0.00
long term
investment
88.29 78.56 70.00 64.39 56.55
Net of current
assets
0.00 0.00 0.00 0.00 0.00 Lands
0.00 0.00 0.00 0.00 0.00
projects under
execution
88.29 78.56 70.00 64.99 59.65
total of current
assets
0.00 0.00 0.00 0.00 0.00 Other assets
90.05 87.54 81.46 79.11 80.21 Total of assets
Liabilities and
equity
Current liabilities
49.69 41.68 40.43 40.17 35.90 Accounts payable
59.13 29.31 1.90 5.68 3.08 Credit banks
0.00 0.00 0.00 0.00 0.00 Short tem loan
99.86 21.59 10.35 0.00 0.00
Current portion of
long-term loans
172.90 175.79 193.97 166.95 141.15
other credit
balances
69.02 40.65 27.76 26.01 21.95
total of current
assets
0.00 8.82 0.00 0.00 0.00 long term loans
0.00 0.00 0.00 0.00 0.00 Corporate Bonds
59.14 36.10 23.79 22.29 18.81 Liabilities total
Equity
125.00 125.00 125.00 125.00 125.00 Capital authorized
125.00 125.00 125.00 125.00 125.00
Capital,
subscribed
125.00 125.00 125.00 125.00 125.00 Capital paid in
122.16 163.52 189.96 206.51 234.13
Compulsory
reserve
100.00 138.38 157.56 157.56 96.20 optional reserve
0.00 0.00 0.00 0.00 0.00 Other reserves
0.00 0.00 0.00 0.00 0.00 Premium issue
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0.00 0.00 0.00 0.00 0.00 Discount issuance
0.00 0.00 0.00 0.00 0.00 Treasure stock
0.00 0.00 0.00 0.00 0.00
Fair value total
change,
97.23 149.50 98.38 60.37 101.27
profits forwarded
profits
105.12 112.63 109.58 106.82 110.15
Total of equity
,stockholders
0.00 0.00 0.00 0.00 0.00 Minority rights
90.05 87.54 81.46 79.11 80.21
Total of equity
,stockholders &
liabilities
The Horizontal analysis of the balance sheet of the National Chlorine industries co.ltd
revealed the following :
1- The total of assets has decreased gradually , and the decrease was in the fixed assets and
noticing that at the same time the current assets has increased gradually and this refers to
the significant increase of cash in the box .
2- The total of liabilities has decreased gradually because of the shortage in all the liabilities
as it is clear in the horizontal analysis statement of balance sheet.
3- Based on the horizontal analysis of balance sheet, the increase of the assets in general
and the decrease of liabilities indicate that the company works properly.
Table (4)
Income statement analysis
2003 - 2004 2003 - 2005 2003 - 2006 2003 - 2007 2003 - 2008
103.54 119.12 98.68 92.17 130.52 Sales
105.49 106.43 99.00 94.21 124.55 Cost of sales
98.21 153.82 97.79 86.61 146.85 Gross profit
134.99 134.18 153.72 144.63 177.96 General & Administrative Expenses
134.97 196.10 186.80 204.95 404.50 Selling expenses
58.82 38.20 18.37 3.23 2.88 Financial expenses
90.22 177.17 82.02 63.73 109.50 Net operating income
65.06 7.61 266.88 42.25 44.38 Net Revenue &other expenses
122.18 140.36 96.25 67.19 99.27 Expenses &other expenses
Profit, year before tax provision
84.37 161.18 101.87 60.95 102.99 Net income before tax
104.17 292.99 246.54 166.31 74.62
Income tax provision
0.00 0.00 0.00 0.00 0.00 Income tax( previous years)
84.02 158.83 99.29 59.08 101.10 Year ,profit
0.00 0.00 0.00 0.00 0.00 Minority rights
84.02 158.83 99.29 59.08 101.10 Net income of shareholder
We notice from the horizontal analysis of the income statement of National Chlorine
industries co.ltd , the following :
1- There are variance in profit during the years and that was because the sales were not in a
fixed increase but sometimes they increase and other times decreased . And there is a
correlation between sales and cost of the sales in that if sales increase , the cost
increases and vice versa.
2- Sales have an influence on the general and administrative expenses and selling and
distributing expenses . The more the sales are , the more administrative expenses needed
for the employees and general expenses ,selling and distributing of the sales .
Based on the horizontal analysis of the income statement and with noticing that more
sales means much more cost of sales and as a result of this ,the other costs increase. So the
company has to increase the sales with finding ways to reduce the related costs of them
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and it is possible, if the company followed traditional methods to determine the costs , to
follow up the costs’ system which is based on the activities to determine the cost of each
activity separately.
Table (5)
Analyzing financial statements
Vertical analysis of the balance sheet
2003 2004 2005 2006 2007 2008 Assets
Current assets
0.02 0.19 0.54 5.00 3.02 11.90 Cash on hand and at bank
11.16 12.03 15.05 13.40 17.96 14.88 Accounts receivable
0.26 1.00 0.86 0.90 0.34 0.19 Documentary credits
1.17 0.60 1.23 1.03 1.34 1.32 Checks Under Collection
0.00 0.00 0.00 0.00 0.00 0.00 Short term investment
1.80 1.04 1.24 1.36 2.79 3.10 Goods
5.30 6.41 9.03 9.32 8.60 8.90
Warehouse, chemicals and
spare parts
19.71 21.28 27.95 31.01 34.05 40.29 total of current assets
0.00 0.00 0.00 0.00 0.00 0.00 Long term investment
80.29 78.72 72.05 68.99 65.35 56.60 Net fixed assets
0.00 0.00 0.00 0.00 0.00 0.00 Lands
0.00 0.00 0.00 0.00 0.60 3.11 projects under execution
80.29 78.72 72.05 68.99 65.95 59.71 Total of fixed assets
0.00 0.00 0.00 0.00 0.00 0.00 Other assets
100.00 100.00 100.00 100.00 100.00 100.00 Total of assets
Liabilities and equity
Current liabilities
9.92 5.47 4.72 4.92 5.04 4.44 Accounts payable
11.89 7.81 3.98 0.28 0.85 0.46 Credit banks
0.00 0.00 0.00 0.00 0.00 0.00 Short term loan
4.69 5.20 1.16 0.60 0.00 0.00
Current portion of long-term
loans
1.58 3.04 3.18 3.77 3.34 2.79 Other balance credits
28.08 21.53 13.04 9.57 9.23 7.69 Total of current liabilities
4.69 0.00 0.47 0.00 0.00 0.00 Long term loan
0.00 0.00 0.00 0.00 0.00 0.00 Corporate Bonds
32.78 21.53 13.51 9.57 9.23 7.69 Total of liabilities
Equity
47.59 66.06 67.95 73.02 75.19 74.15 Capital authorized
47.59 66.06 67.95 73.02 75.19 74.15 Capital, subscribed
145.18 66.06 67.95 73.02 75.19 74.15 Capital paid in
8.73 3.88 5.35 6.67 7.47 8.35 Compulsory reserve
1.72 1.91 2.72 3.33 3.43 2.07 optional reserve
0.00 0.00 0.00 0.00 0.00 0.00 Other reserves
8.92 0.00 0.00 0.00 0.00 0.00 Premium issue
0.00 0.00 0.00 0.00 0.00 0.00 Discount issuance
0.00 0.00 0.00 0.00 0.00 0.00 Treasure stock
0.00 0.00 0.00 0.00 0.00 0.00 Fair value total change,
6.13 6.62 10.47 7.41 4.68 7.74 profits forwarded profits
67.22 78.47 86.49 90.43 90.77 92.31 Total of equity ,stockholders
0.00 0.00 0.00 0.00 0.00 0.00 Minority rights
100.00 100.00 100.00 100.00 100.00 100.00
Total of equity ,stockholders
&liabilities
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We notice the following from the Vertical analysis of the balance sheet:
1- The importance of current assets increased during the years (2003-2008) where the total
of the current assets was 19.71% in 2003 and become 40.29% in 2008 and this refers to the
increase of the cash in the box and at the bank and the goods.
2- Fixed assets decreased during the years (2003-2008)respectively where the total of the
fixed assets was 80.29% n 2003 and becomes 59.71% in 2008 , and this refers to the
decrease in the fixed assets .
3- Total of liabilities decreased during the years (2003-2008) respectively where the total of
liabilities was 32.78% in 2003 and becomes 7.69% in 2008 and this refers to the
noticeable decrease in the accounts payables
Based on vertical analysis of the balance sheet , the company focused greatly on in the
increase of current assets and in return reducing liabilities and this means the company’s
capability in facing its commitments on time for the availability of liquidity and this is a
positive indication but the company has to determine liquidity ratio that should be available
in the company to face these commitments and to increase its sales to achieve higher profits in
the coming years.
Table (6)
Vertical Analysis of Income Statement
2003 2004 2005 2006 2007 2008
100.00 100.00 100.00 100.00 100.00 100.00 Sales
73.22 74.60 65.42 73.46 74.83 69.87 Cost of sales
26.78 25.40 34.58 26.54 25.17 30.13 Gross profit
3.56 4.64 4.01 5.54 5.58 4.85
General &
Administrative
Expenses
3.99 5.20 6.57 7.56 8.88 12.37 selling expenses
3.94 2.24 1.26 0.73 0.14 0.09 Financial expenses
15.29 13.32 22.74 12.71 10.57 12.83 Net operating income
1.79 1.12 0.11 4.84 0.82 0.61
Net Revenue &other
expenses
1.45 1.71 1.71 1.41 1.06 1.10
Expenses &other
expenses
15.63 12.74 21.15 16.13 10.34 12.33
Profit, year before
tax provision
15.63 12.74 21.15 16.13 10.34 12.33 Net income before tax
0.27 0.28 0.67 0.68 0.49 0.16 Income tax provision
0.00 0.00 0.00 0.00 0.00 0.28
Income tax( previous
years)
15.36 12.46 20.47 15.45 9.84 11.89 Year ,profit
0.00 0.00 0.00 0.00 0.00 0.00 Minority rights
15.36 12.46 20.47 15.45 9.84 11.89
Net income of
shareholder
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We notice from the vertical analysis of the income statement the following :
1- The profit in the year 2005 was 20.47% and this was the highest ratio of profit
during the years (2003-3008), and this refers to the great reduction of the sales’ cost .
First : Analyzing Liquidity Ratios :
The liquidity ratios aimed to evaluate the company’s financial capability for short term
through measuring the company’s capability to meet its short term commitments when they
are due .
Table (7)
Financial ratios analysis
2008 2007 2006 2005 2004 2003 Liquidity ratios
5.24 3.69 3.24 2.14 0.99 0.70
Current Ratio =
current assets /
Current liabilities
3.68 2.45 2.12 1.36 0.64 0.45
Quick Liquidity Ratios =
(current assets-
inventory)/current
liabilities
1.55 0.33 0.52 0.04 0.01 0.00
Cash ratio =cash +
marketable securities /
current liabilities
3,957,203 2,969,933 2,642,337 1,974,474 33,749- 1,267,150-
Net Working Capital =
current assets -
current liabilities
We notice from the table that liquidity rations were higher in 2008 than it was in the previous
years , and this means the following :
1- Current ratios : the company’s ability to cover its current liabilities
2- Quick Liquidity Ratios: the adequacy of sources of cash and cash equivalent in the
company I meeting its short term commitments.
3- Cash ratio : the company’s assets of cash are the most liquid assets in the company
and therefore the company depends basically on them to fulfill its commitments
especially if the company could not Liquidate other assets.
4- Net working capital: the current assets increased rapidly which led to an increase in
the current liabilities .
And according the management accountant’s point of view , the analysis of the
liquidity ratios clarifies that the company has the ability to meet its commitment on time
,cover its liabilities but it should be known the extent of the company’s preservation of
the amount of the current assets especially the cash to face its commitments and the
increase of cash in the company may lead to the risk of not utilizing the current assets.
And the current assets ratios should be the double of the current liabilities so as the
company can meet its commitments on time .
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Second : The Analysis of Profitability Ratios :
The profitability ratios reflect the extent of efficiency by which the company takes its
Investment decisions and measures the extent of the company management efficiency in
achieving profit on the sales , assets and the owners’ rights.
Table (8)
Financial Ratios Analysis
2008 2007 2006 2005 2004 2003 Profitability Ratios
0.09 0.05 0.08 0.13 0.06 0.14
return on assets = Net profit+ Interest Expenses ( 1 - tax
ratio /)average total assets
0.09 0.06 0.09 0.15 0.08 0.10
Return on owners' equity = net profit /average of
owners' equity
We conclude the following from Profitability Ratios:
1- Return on Assets was high in 2003 where it was 0.14% and there was not a
continuous increase in the ratio.
2- Return on equity was high in 2005 with 0.15% and there was not a continuous
increase in the ratio.
based on this ,the company did not take its decisions in achieving the profit on sales
efficiently.
According to the management accountant’s point of view , it is necessary to know the
reasons of the fluctuation of the profit ,to know the company’s production and the sales’
volume and to identify the most effective production lines and to control the least effective
production lines to find out the reasons for this fluctuation and to use the modern methods to
determine the cost of products as the method of activity based costing instead of the
traditional methods and this in turn reduces the costs.
Third: Analyzing Debt Ratios
Debt ratios measure the extent of the company’s dependence on others’ money to finance its
needs.
Table (9)
2008
2007 2006 2005 2004 2003 Debt ratios
0.08 0.09 0.10 0.14 0.22 0.33
Debt Ratio / shareholders’ equity =total of liabilities /
shareholders’ equity
0.00 0.00 0.00 0.00 0.00 0.05
Long term debt ratio/shareholders’ equity =long term
shareholders ’equity /shareholders’ equity
It is noticeable from the debt ratios the following : the company reduced its dependence
on others in financing its needs which means risk reduction which the company may it face in
case it did not fulfil its commitment to others. And according to the administrative
accountant’s opinion , the debt ratios are considered as a good indicator to the extent of the
company’s dependence on others money in financing its needs which means the company’s
capability to use its resources properly , to expand its business and dept repayment without the
need to borrow from others.
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Fourth : Analyzing Activity Ratios
Activity ratios are called Assets Management Ratios and it measures the efficiency of the
company’s management in distributing its financial resources properly for all types of assets
and its efficiency in using its assets to produce as much as possible of goods and services .
Table (10)
Activity Ratios
2008 2007 2006 2005 2004 2003 Activity Ratios
20.55 19.16 12.08 10.38 14.15 9.79
Turnover of goods / day =balance average of
goods * 360 / goods cost
79.95 108.81 97.45 80.44 84.78 44.55
average collection period /day =Average accounts
receivable
* 360 / net annual sales
0.30 0.25 0.27 0.35 0.25 0.27 Profitability ratios = total profit /net of sales
0.13 0.11 0.13 0.23 0.13 0.15 Net profit ratio /sales =net profit /net sales
0.12 0.10 0.16 0.21 0.13 0.16
Profitability ratios =net profitability before
interest ,tax ,revenues,& other expenses) /)net sales
4.50 3.31 3.69 4.48 4.25 8.08
Account receivable turnover =net sales /account
receivable average
17.52 18.79 29.81 34.68 25.45 36.75
Turnover of goods =cost of goods sold /balance of
goods
2.57 2.24 2.92 8.38
-
10.86
-
10.77
Net working capital turnover =net sales /net
working capital
0.74 0.52 0.53 0.60 0.49 0.90
Total assets turnover =net assets /average total
assets
We notice the following from the analysis of activity ratios:
1- Turnover of goods was in 2008more than it was in 2003, and this is a good indicator of
the extent of the efficiency and the effectiveness of the inventory management where
the turnover inventory increased , the better it was .
2- The collection period was higher in 2007 where it reached 108.81% while it increased
in 2008 to be 79.95% and this is not a good indicator because this percent indicates
the extent of the efficiency of credit management and the extent of the efficiency of
the credit and collection policies .
3- Net Working Capital Turnover was in an increase during the years 2003-2008 where it
increases in 2008 to be 2.57% while it was 10.77% in 2003, and this indicates the
efficiency of the company’s management of Net Working Capital.
4- It is noticeable that the ratios’ analysis regarding the profit varied during the years
2003-2008, where it was not in a continuous increase and this refers to what the
company and sales achieved .
And according to the administrative accountant’s opinion of the analysis of the activity
ratios that there is instability in the efficiency of the company management in distributing its
financial resources for all different types of assets and its efficiency in using its assets to
produce as much as possible of goods and services so the company has to get benefit of
managers and management accountants who are specialized to help the company to use its
sources efficiently so as to achieve high returns.
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Fifth : Analyzing Market Ratios
Table (11)
Market Ratios
2008 2007 2006 2005 2004 2003
Market Ratios
0.90 1.03 1.10 1.63 1.57 1.88
Market value ratio /book value=market share price/book
value per share
0.00 0.00 0.07 0.07 0.05 0.00
return distribution ratio = earnings per share /Share
market
We notice from analyzing the market ratios the following :
1- Market value ratio /carrying value is considered as an indicator to evaluate the
investors of the company and it is expected that the investors to pay higher than the
carrying value to the company’s shares.
2- Return distribution ratio : used to judge on investment opportunities.
Based on this, we notice that Market ratios of the company fluctuated which is
considered as a negative indication that leads to a decrease in the number of investors
in the company and the opportunities in the company as well.
And according the administrative accountant the company has to increase its profits so as
to increase the share’s profit and so there will be an increase in the return distribution ratios ,
and this gives a positive image of the company to the investors which increase the company’s
investments , its profits and its sales.
4. Results and Recommendations:
4.1 Results of the study were as follows :
The management accountant has a role in the process of evaluating the performance , and
there is an effect of using deviation analysis in the National Chlorine industries co.ltd that
helps in identifying the causes of these deviations and therefore to adjust them. And there are
no obstacles prevent using the deviation analysis in the National Chlorine industries co.ltd
because it is easy to detect the deviation through using simple methods as financial ratios.
Based on these results, the researcher recommended the following :
It is necessary that the National Chlorine industries co.ltd pays attention of increasing its
profits through increasing its sales and this can be achieved by controlling production lines
and know which line achieved the highest production and which one achieved the lowest
one and to find solutions. It is also necessary to pay attention of providing employees who
are qualified scientifically and practically to implement the work of the company properly
by utilizing and developing the available resources . It is important to establish an
independent management accounting department to evaluate the performance of the
company through deviation analysis in order to treat these deviations as the moment they
occurred and to overcome them . The company has to provide and develop its software to
complete the work in short time and save effort and labors.
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References
- Al-Matarna, Ghasan Falah, (2003)“ An introduction in Cost Accounting ,” Dar Wael for
publishing ,Amman, Jordan..
- Hilton, R.( 2002). Managerial Accounting. MC Graw- Hill, New York
- Abdallah, Ali(2008) , Financial Analysis and its uses for controlling the performance and
revealing the deviations , Unpublished thesis , University of Open Arab Academy , Denmark
- Abo Nasar, Mohammad( 2005), “Management Accounting”, Dar Wael for Publishing and
distribution,Amman,Jordan.
- Abo-Hasan,Ali,(1996) Advanced Management Accounting ,1
st
ed, Dar Jamea, Alexandria.
- Al-Hadidi ,Isra`,(2005). Extent of using methods of management accounting in the Jordanian
public industrial companies and their effect on the performance , Unpublished thesis,
University of Jordan, Amman Jordan.
- Hetger, Listrai& Matoltch, Seirj( 1988) , management Accounting , translation Hajaj,
Ahmad, Ryadh , Saudia.
- Kahala, Jebrael& Hanan,Radwan,(1998) Standard cost accounting : control and proof, 2
nd
,
Dar Athagafa for publishing and distribution , Amman , Jordan .
- Khalel, Atallah Warad&Alrazaq, Saleh Abdallah,( 1997) “ Cost Accounting ,” Dar Zahran
for publishing and distribution , Amman , Jordan .
- Meri`, Ateia( 2008),Management Accounting : Basics of planning , making decisions
,controlling and evaluating the performance , Dar Alfath Atajleed Alfani, Alexandria.
- Saedah , Mansoor( 1993) , management accounting with a focus on the costs for the purpose
of planning ,decision –making , controlling and evaluating the performance , Ram
Institution for technology and computer ,Mo`ta , Alkarak.
-Ammara, Majdi,(1980) “ Cost Accounting : measuring of decisions’ control ,” Cairo , Egypt
- Emsley, David(2001). Redesigning Variance Analysis for Problem solving .http://papers.ssrn.com/sol3/papers.cfm?abstract_id=261182
doc_555423058.pdf
This study aimed to identify the role of the management accountant in evaluating the companies' performance through using the financial analysis methods in evaluating the performance of the National Chlorine industries co.ltd.
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The Role of Financial Analysis Ratio in Evaluating Performance
(Case Study: National Chlorine industry)
Abdel- Rahman kh. El- Dalabeeh
Accounting Department, Faculty of Finance and Business Administration, AL al-bayt University,
Mafraq, Jordan
Abstract
This study aimed to identify the role of the management accountant in evaluating the
companies’ performance through using the financial analysis methods in evaluating the
performance of the National Chlorine industries co.ltd. The analytical approach, which is
based on the analysis of the financial statements for five years except 2003 , was adopted in
this study and the Horizontal Analysis ,Vertical Analysis and Financial Ratios, which were
the most common between 2003-2008, were applied. The study concluded that having an
administrator accountant to analyze the financial statements of the National Chlorine
industries co.ltd leads to identify and explain the deviations and the undesired extreme results.
And through training the employees, it is possible to use other methods to analyze the
deviations that help in evaluating the company through identifying the causes for these
deviations. The researcher recommended establishing an independent department for the
management accounting in the company to evaluate its performance through analyzing the
deviations and treat them and to provide qualified employees; scientifically and practically to
do the work of the company.
Keywords: Role ; Financial Analysis Ratio ; Evaluating Performance ; National Chlorine
industry
1. Introduction:
The management accounting is considered one of the most important components of the
system of the administrative information in the company by providing the economic and
financial information and collecting information taken from other systems of information in
the company so it looks as accounting for inner affairs that helps the administration in
making decisions ,planning , controlling and evaluating the performance of the company’s
activities , therefore it is not restricted to the known accounting principles but it depends on
basis and regulations concerning the content and the shape of the inner reports
1
.
And due to the competition circumstances between the projects for the resources and the
markets in the local and international levels, the importance of using the methods of
accounting arose in studying the historical and economic data to estimate the revenues and the
appropriate costs of these decisions , and the management accounting role is to find solutions
to these deviations in order to avoid them in future , and develop the company to achieve
higher revenues and to have a place in the competitive market
2
.
1
Meri`, Ateia( 2008),Management Accounting : Basics of planning , making decisions ,controlling and
evaluating the performance , Dar Alfath Atajleed Alfani, Alexandria
2
Previous reference ,p 12.
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1.1 The problem of the study:
The Industrial Corporations are considered distinguished companies in Jordan, and one of
these companies is the National Chlorine industries co.ltd which tried to do its work
properly through reducing the deviations to achieve its final target which is achieving high
profits. The problem of the study is represented by answering the following questions:
What is the management accounting role in evaluating the performance of the National
Chlorine industries co.ltd through using the methods of financial analysis (Horizontal
Analysis ,Vertical Analysis and Financial Ratios) ?
1.2 Objectives of the study:
This study aims to achieve the following objectives:
1- To identify the role of management accounting in evaluating the performance of
the National Chlorine industries co.ltd by using Vertical Analysis Method?
2- To identify the role of the management accounting in evaluating the performance
of the National Chlorine industries co.ltd by using Horizontal Analysis Method?
3- To identify the role of the management accounting in evaluating the performance
of the National Chlorine industries co.ltd by using Financial Ratios ?
1.3 Significance of the study
The importance of using the financial analysis methods in the National Chlorine industries
co.ltd is represented by providing the appropriate and accurate information to know the
reasons of the deviations and then to evaluate the company’s performance .
2. Conceptual Framework and Previous Studies
2.1 An Introduction about the National Chlorine industries co. ltd
The National Chlorine industries co.ltd was established as limited public shareholding
company by the law of companies N(1) to the year 1989 and registered in the record of the
limited public shareholding companies under N( 212) in 09/11/1991 and in 15/03/1992 the
company has the right to start working . The company established its factories in Mowager,
the southern area of the east of Amman. One of the company’s goals is to establish a
factory to produce Chlorine and caustic soda and their products, to buy raw materials,
machines, necessary tools to achieve their goals in addition to sell, market the company’s
products and distribute them locally or export them abroad. The main Market of liquid
caustic soda’s product is in Jordan and its estimated volume of internal sales to Jordan is
about (85%-90%) of Soda production and what remains is sold to Syria, Lebanon, and Iraq.
While Jordan share’s of Chlorine gas does not exceed (25%) of the production and what
remains is exported to Iraq, Syria and Lebanon.The National Chlorine industries co.ltd is
exposed to an external competition of Kuwaiti, Saudi and Egyptian products which have a
whole custom exemption in Jordan where the companies , most of times, lowered their
prices than at cost.
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2.2 Methods of Management Accounting
The system of administrative accounting is considered the most important component of
the administration information system in the project because it supplies the economic and
financial information and do all the work of other branches of information system of the
project and the main purpose of these processes which the system of administrative
accounting does is to prepare the reports that include the necessary information for planning ,
controlling and evaluating the performance in order to take the appropriate decisions
3
.
Meri` defined the administrative accounting as “ It is an information system that collect
and analyze data concerning useful issues , or phenomena , or economic phenomena in the
field of information production help in taking decisions that have economic effect on the
resources, the economic projects’ commitment and the society fortune as a whole unit. And
this information could be happened in the past or in the present and it is expected to last till
near future or it is expected to happen in the future and it has no relation with past or present.
4
And Abu Alhasan, defined management accounting as “Information system specialized in
collecting, analyzing, classifying and storing basic data or information resulted from other
systems of information in the company to produce information which are naturally
quantitative financially or non financially, then they are presented to the higher administration
to use them in planning, taking decisions and controlling the plans’ implementation”.
5
And regarding the importance of the administrative accounting in serving the employees of
the company, its objectives from Hilton’s point of view is
6
: “provide information for the sake
of planning processes and making decisions, help the managers in guiding and controlling the
operative activities and motivate the mangers and other employees, measure the performance,
units, managers and the employees who work in the company and improve the company’s
competitive situation”.
2.3 Performance Evaluation:
The performance evaluation is considered as the final step in a series of the administrative
process where the administrative process starts by identifying the desired objectives as a result
of utilizing the available resources to the administrative unit, then a plan is prepared to achieve
these objectives followed by the control process over the implementation in order to identify
the deviations of the actual results of what the plan and the objectives identified as expected
results and the control process leads the evaluation process.
3
Abo-Hasan,Ali,(1996) Advanced Management Accounting ,1
st
ed, Dar Jamea, Alexandria
4
Meri`, Ateia( 2008),Management Accounting : Basics of planning , making decisions ,controlling and
evaluating the performance , Dar Alfath Atajleed Alfani, Alexandriap 11
5
Abo-Hasan,Ali,(1996) Advanced Management Accounting ,1
st
ed, Dar Jamea, Alexandria
6
Hilton, R.( 2002). Managerial Accounting ,p6
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The process of evaluation is the most difficult administrative tasks because it includes many
different variables, some are descriptive and others are personal and because of this, it seems
difficult to measure the performance. But having standards for evaluating the performance
means the availability of a physical measurement could be applied for the individuals. The
standards provide an effective model for evaluating the performance
7
. And evaluating the
performance is one of the systematic control steps of the costs and these costs include the
following :
8
1- Preparing the approach : this step is done at the level of planning
2- The control: this step starts at the beginning of the implementation level and
continues till the actual implementation level is over. And in this level the
performance is evaluated in terms of the comparison between the authorized
standards of planning level and the results of the actual performance and
implementation.
3- The judgment: to evaluate to the performance and identify the level of the
efficient productivity.
4- The treatment: writing a report of the urgent deviations and their causes to
decisions as a treatment for them.
2.4 Evaluation the financial performance:
The financial evaluation performance has a big importance in world of economy and it was
what the studies of accounting and administration focused greatly on.
The financial reports which are prepared in the company is considered as an important tool to
evaluate the financial performance where analyzing these reports helps in identifying the
company’s points of weakness and strength and work on the weakness to find solutions. The
financial ratio is the most common method used to analyze the financial reports and has an
accurate evaluation to treat the points of weakness, effectively and efficiently. The financial
ratios do not add new information but it is helpful in explaining the relation between the
variables to come up with results.
2.5 Previous studies:
1- The study of Abdallah (2008)
9
aimed to identify whether the Jordanian industrial
companies applied the modern management accounting and to identify the most
important benefits the companies get from these methods . The results of the study
showed that the most important benefits of applying these methods is providing the
administrations with the appropriate information in appropriate time, improving the
products’ quality and reducing the costs.
2- The study of Emsley
10
aimed to clarify how the management accounting can design
an analysis to the deviations to solve the problems at the level of operations. A case
7
- Hetger, Listrai& Matoltch, Seirj( 1988) , management Accounting , translation Hajaj, Ahmad, Ryadh , Saudia
8
Kahala, Jebrael& Hanan,Radwan,(1998) Standard cost accounting : control and proof, 2
nd
, Dar Athagafa for
publishing and distribution , Amman , Jordan .
9
Abdallah, Ali(2008) , Financial Analysis and its uses for controlling the performance and revealing the
deviations , Unpublished thesis , University of Open Arab Academy , Denmark
10
Emsley, David(2001). Redesigning Variance Analysis for Problem solving .http://papers.ssrn.com/sol3/papers.cfm?abstract_id=261182
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study was used to describe a number of improvements inserted into solving the
practical problems in the company including changes in the system as the analysis
deviation after discussing these improvement in group work. The study concentrated
on four changes affect the deviation analysis and suggested four improvements. The
results showed that three of these suggestions improved problem solution .
3- The study of Al-Hadidi(2005)
11
aimed to identify the extent of using the methods of
management accounting by the Jordanian public industrial companies in the field of
taking decisions, controlling and planning and it also aimed to reveal the degree of
variance between applying these methods and the financial performance of these
companies and to identify the difficulties which they faced using the management
accounting methods in these companies . It was found that the common method used
in taking decisions is the total cost , in planning is the operational budgets while in
the control , the most common methods used is the comparison with the previous years
, responsibility accounting , performance reports and calculating the deviations. The
least methods used in making decisions is the system of Activity-Based Costing and in
the control is balance score card.
3. Methods of collecting data
For the purpose of collecting data , the researcher depends on the following methods:
-Arabic and foreign Books, journals and other references which addressed the topic of the
financial analysis and evaluating the performance were considered as the basic reference
for the theoretical information about the topic of this study.
- And regarding the information of the applicable side , the researcher depends on the
financial reports of the National Chlorine industries co.ltd with the help of Securities
Commission-Amman-Jordan.
3.1Financial and Statistical methods used in the analysis:
There are many financial and statistical methods used in this research as:
1- Financial ratios as liquidity and profitability ratios.
2- Vertical and horizontal analysis of the financial statements
11
Al-Hadidi ,Isra`,(2005). Extent of using methods of management accounting in the Jordanian public industrial
companies and their effect on the performance , Unpublished thesis, University of Jordan, Amman Jordan
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Table (1)
Balance Sheet (2003-2008)
2008 2007 2006 2005 2004 2003 Assets
Current assets
1,444,150 361,725 616,591 71,754 25,834 3,069 Cash on hand and at bank
1,805,489 2,149,889 1,651,440 1,993,513 1,638,583 1,688,573 Accounts receivable
23,380 41,204 110,837 113,524 136,434 39,874 Documentary credits
160,453 159,891 126,794 163,321 82,284 176,654 Checks Under Collection
0 0 0 0 0 0 Short term loan
376,820 333,399 167,524 164,304 142,320 271,829 Goods
1,079,681 1,029,211 1,148,779 1,195,539 873,624 802,209
Warehouse, chemicals and
spare parts
4,889,973 4,075,319 3,821,965 3,701,955 2,899,079 2,982,208 Total of current assets
0 0 0 0 0 0 Long term investment
6,869,638 7,822,942 8,503,652 9,543,921 10,725,450 12,148,568 Net fixed assets
0 0 0 0 0 0 Lands
377,312 72,081 0 0 0 0 projects under execution
7,246,950 7,895,023 8,503,652 9,543,921 10,725,450 12,148,568 Total of fixed assets
0 0 0 0 0 0 Other assets
12,136,923 11,970,342 12,325,617 13,245,876 13,624,529 15,130,776 Total of assets
Liabilities and equity
Current liabilities
538,833 602,868 606,828 625,487 745,720 1,500,842 Accounts payable
55,486 102,221 34,206 527,210 1,063,541 1,798,743 Credit banks
0 0 0 0 0 0 Short term loan
0 0 73,518 153,276 708,998 710,000
Current portion of long-term
loans
338,451 400,297 465,076 421,508 414,569 239,773 other credit balances
932,770 1,105,386 1,179,628 1,727,481 2,932,828 4,249,358 Total of current liabilities
0 0 0 62,652 0 710,000 Long term loans
0 0 0 0 0 0 Corporate Bonds
932,770 1,105,386 1,179,628 1,790,133 2,932,828 4,959,358 Liabilities total
Equity
9,000,000 9,000,000 9,000,000 9,000,000 9,000,000 7,200,000 Capital authorized
9,000,000 9,000,000 9,000,000 9,000,000 9,000,000 7,200,000 Capital, subscribed
9,000,000 9,000,000 9,000,000 9,000,000 9,000,000 7,200,000 Capital paid in
1,013,922 894,282 822,639 708,136 529,001 433,054 Compulsory reserve
250,674 410,580 410,579 360,579 260,579 260,579 optional reserve
0 0 0 0 0 0 Other reserves
0 0 0 0 0 1,350,000 Premium issue
0 0 0 0 0 0 Discount issuance
0 0 0 0 0 0 Treasure stock
0 0 0 0 0 0 Fair value total change,
939,557 560,094 912,771 1,387,028 902,121 927,785 profits forwarded profits
11,204,153 10,864,956 11,145,989 11,455,743 10,691,701 10,171,418 Total of equity ,stockholders
0 0 0 0 Minority rights
12,136,923 11,970,342 12,325,617 13,245,876 13,624,529 15,130,776
Total of equity ,stockholders
& liabilities
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Table (2)
Income list for(2008-2003)
2008 2007 2006 2005 2004 2003
8,905,038 6,288,605 6,732,370 8,127,405 7,064,271 6,822,646 Sales
6,221,747 4,706,025 4,945,646 5,316,833 5,269,848 4,995,471 Cost of sales
2,683,291 1,582,580 1,786,724 2,810,572 1,794,423 1,827,175 Gross Profit
431,777 350,900 372,966 325,549 327,506 242,622
General &
Administrative
Expenses
1,101,547 558,133 508,705 534,028 367,545 272,323 Selling expenses
7,745 8,695 49,428 102,796 158,270 269,074 Financial expenses
1,142,222 664,852 855,625 1,848,199 941,102 1,043,156 Net operating income
54,176 51,577 325,792 9,295 79,424 122,073
Net Revenue &other
expenses
98,151 66,433 95,167 138,780 120,804 98,872
Expenses &other
expenses
1,098,247 649,996 1,086,250 1,718,714 899,722 1,066,357
Profit, year before
tax provision
1,098,247 649,996 1,086,250 1,718,714 899,722 1,066,357 Net income b.tax
13,924 31,033 46,004 54,672 19,439 18,660 Income tax provision
25,126 0 0 0 0 0
Income tax, previous
years
1,059,197 618,963 1,040,246 1,664,042 880,283 1,047,697 Year, profit
0 0 0 0 0 0 Minority rights
1,059,197 618,963 1,040,246 1,664,042 880,283 1,047,697
Net income of
shareholder
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Table (3)
Analysis of financial reports
(Horizontal analysis of balance sheet
2003 - 2004 2003 - 2005 2003 - 2006 2003 - 2007 2003 - 2008 Assets
Current assets
841.77 2338.03 20090.94 11786.41 47056.04
Cash on hand and
at bank
97.04 118.06 97.80 127.32 106.92
Accounts
receivable
342.16 284.71 277.97 103.34 58.63
Documentary
credits
46.58 92.45 71.78 90.51 90.83
Checks Under
Collection
Short term
investment
52.36 60.44 61.63 122.65 138.62 Goods
108.90 149.03 143.20 128.30 134.59
Warehouse,
chemicals and
spare parts
97.21 124.13 128.16 136.65 163.97
total of current
assets
0.00 0.00 0.00 0.00 0.00
long term
investment
88.29 78.56 70.00 64.39 56.55
Net of current
assets
0.00 0.00 0.00 0.00 0.00 Lands
0.00 0.00 0.00 0.00 0.00
projects under
execution
88.29 78.56 70.00 64.99 59.65
total of current
assets
0.00 0.00 0.00 0.00 0.00 Other assets
90.05 87.54 81.46 79.11 80.21 Total of assets
Liabilities and
equity
Current liabilities
49.69 41.68 40.43 40.17 35.90 Accounts payable
59.13 29.31 1.90 5.68 3.08 Credit banks
0.00 0.00 0.00 0.00 0.00 Short tem loan
99.86 21.59 10.35 0.00 0.00
Current portion of
long-term loans
172.90 175.79 193.97 166.95 141.15
other credit
balances
69.02 40.65 27.76 26.01 21.95
total of current
assets
0.00 8.82 0.00 0.00 0.00 long term loans
0.00 0.00 0.00 0.00 0.00 Corporate Bonds
59.14 36.10 23.79 22.29 18.81 Liabilities total
Equity
125.00 125.00 125.00 125.00 125.00 Capital authorized
125.00 125.00 125.00 125.00 125.00
Capital,
subscribed
125.00 125.00 125.00 125.00 125.00 Capital paid in
122.16 163.52 189.96 206.51 234.13
Compulsory
reserve
100.00 138.38 157.56 157.56 96.20 optional reserve
0.00 0.00 0.00 0.00 0.00 Other reserves
0.00 0.00 0.00 0.00 0.00 Premium issue
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0.00 0.00 0.00 0.00 0.00 Discount issuance
0.00 0.00 0.00 0.00 0.00 Treasure stock
0.00 0.00 0.00 0.00 0.00
Fair value total
change,
97.23 149.50 98.38 60.37 101.27
profits forwarded
profits
105.12 112.63 109.58 106.82 110.15
Total of equity
,stockholders
0.00 0.00 0.00 0.00 0.00 Minority rights
90.05 87.54 81.46 79.11 80.21
Total of equity
,stockholders &
liabilities
The Horizontal analysis of the balance sheet of the National Chlorine industries co.ltd
revealed the following :
1- The total of assets has decreased gradually , and the decrease was in the fixed assets and
noticing that at the same time the current assets has increased gradually and this refers to
the significant increase of cash in the box .
2- The total of liabilities has decreased gradually because of the shortage in all the liabilities
as it is clear in the horizontal analysis statement of balance sheet.
3- Based on the horizontal analysis of balance sheet, the increase of the assets in general
and the decrease of liabilities indicate that the company works properly.
Table (4)
Income statement analysis
2003 - 2004 2003 - 2005 2003 - 2006 2003 - 2007 2003 - 2008
103.54 119.12 98.68 92.17 130.52 Sales
105.49 106.43 99.00 94.21 124.55 Cost of sales
98.21 153.82 97.79 86.61 146.85 Gross profit
134.99 134.18 153.72 144.63 177.96 General & Administrative Expenses
134.97 196.10 186.80 204.95 404.50 Selling expenses
58.82 38.20 18.37 3.23 2.88 Financial expenses
90.22 177.17 82.02 63.73 109.50 Net operating income
65.06 7.61 266.88 42.25 44.38 Net Revenue &other expenses
122.18 140.36 96.25 67.19 99.27 Expenses &other expenses
Profit, year before tax provision
84.37 161.18 101.87 60.95 102.99 Net income before tax
104.17 292.99 246.54 166.31 74.62
Income tax provision
0.00 0.00 0.00 0.00 0.00 Income tax( previous years)
84.02 158.83 99.29 59.08 101.10 Year ,profit
0.00 0.00 0.00 0.00 0.00 Minority rights
84.02 158.83 99.29 59.08 101.10 Net income of shareholder
We notice from the horizontal analysis of the income statement of National Chlorine
industries co.ltd , the following :
1- There are variance in profit during the years and that was because the sales were not in a
fixed increase but sometimes they increase and other times decreased . And there is a
correlation between sales and cost of the sales in that if sales increase , the cost
increases and vice versa.
2- Sales have an influence on the general and administrative expenses and selling and
distributing expenses . The more the sales are , the more administrative expenses needed
for the employees and general expenses ,selling and distributing of the sales .
Based on the horizontal analysis of the income statement and with noticing that more
sales means much more cost of sales and as a result of this ,the other costs increase. So the
company has to increase the sales with finding ways to reduce the related costs of them
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and it is possible, if the company followed traditional methods to determine the costs , to
follow up the costs’ system which is based on the activities to determine the cost of each
activity separately.
Table (5)
Analyzing financial statements
Vertical analysis of the balance sheet
2003 2004 2005 2006 2007 2008 Assets
Current assets
0.02 0.19 0.54 5.00 3.02 11.90 Cash on hand and at bank
11.16 12.03 15.05 13.40 17.96 14.88 Accounts receivable
0.26 1.00 0.86 0.90 0.34 0.19 Documentary credits
1.17 0.60 1.23 1.03 1.34 1.32 Checks Under Collection
0.00 0.00 0.00 0.00 0.00 0.00 Short term investment
1.80 1.04 1.24 1.36 2.79 3.10 Goods
5.30 6.41 9.03 9.32 8.60 8.90
Warehouse, chemicals and
spare parts
19.71 21.28 27.95 31.01 34.05 40.29 total of current assets
0.00 0.00 0.00 0.00 0.00 0.00 Long term investment
80.29 78.72 72.05 68.99 65.35 56.60 Net fixed assets
0.00 0.00 0.00 0.00 0.00 0.00 Lands
0.00 0.00 0.00 0.00 0.60 3.11 projects under execution
80.29 78.72 72.05 68.99 65.95 59.71 Total of fixed assets
0.00 0.00 0.00 0.00 0.00 0.00 Other assets
100.00 100.00 100.00 100.00 100.00 100.00 Total of assets
Liabilities and equity
Current liabilities
9.92 5.47 4.72 4.92 5.04 4.44 Accounts payable
11.89 7.81 3.98 0.28 0.85 0.46 Credit banks
0.00 0.00 0.00 0.00 0.00 0.00 Short term loan
4.69 5.20 1.16 0.60 0.00 0.00
Current portion of long-term
loans
1.58 3.04 3.18 3.77 3.34 2.79 Other balance credits
28.08 21.53 13.04 9.57 9.23 7.69 Total of current liabilities
4.69 0.00 0.47 0.00 0.00 0.00 Long term loan
0.00 0.00 0.00 0.00 0.00 0.00 Corporate Bonds
32.78 21.53 13.51 9.57 9.23 7.69 Total of liabilities
Equity
47.59 66.06 67.95 73.02 75.19 74.15 Capital authorized
47.59 66.06 67.95 73.02 75.19 74.15 Capital, subscribed
145.18 66.06 67.95 73.02 75.19 74.15 Capital paid in
8.73 3.88 5.35 6.67 7.47 8.35 Compulsory reserve
1.72 1.91 2.72 3.33 3.43 2.07 optional reserve
0.00 0.00 0.00 0.00 0.00 0.00 Other reserves
8.92 0.00 0.00 0.00 0.00 0.00 Premium issue
0.00 0.00 0.00 0.00 0.00 0.00 Discount issuance
0.00 0.00 0.00 0.00 0.00 0.00 Treasure stock
0.00 0.00 0.00 0.00 0.00 0.00 Fair value total change,
6.13 6.62 10.47 7.41 4.68 7.74 profits forwarded profits
67.22 78.47 86.49 90.43 90.77 92.31 Total of equity ,stockholders
0.00 0.00 0.00 0.00 0.00 0.00 Minority rights
100.00 100.00 100.00 100.00 100.00 100.00
Total of equity ,stockholders
&liabilities
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We notice the following from the Vertical analysis of the balance sheet:
1- The importance of current assets increased during the years (2003-2008) where the total
of the current assets was 19.71% in 2003 and become 40.29% in 2008 and this refers to the
increase of the cash in the box and at the bank and the goods.
2- Fixed assets decreased during the years (2003-2008)respectively where the total of the
fixed assets was 80.29% n 2003 and becomes 59.71% in 2008 , and this refers to the
decrease in the fixed assets .
3- Total of liabilities decreased during the years (2003-2008) respectively where the total of
liabilities was 32.78% in 2003 and becomes 7.69% in 2008 and this refers to the
noticeable decrease in the accounts payables
Based on vertical analysis of the balance sheet , the company focused greatly on in the
increase of current assets and in return reducing liabilities and this means the company’s
capability in facing its commitments on time for the availability of liquidity and this is a
positive indication but the company has to determine liquidity ratio that should be available
in the company to face these commitments and to increase its sales to achieve higher profits in
the coming years.
Table (6)
Vertical Analysis of Income Statement
2003 2004 2005 2006 2007 2008
100.00 100.00 100.00 100.00 100.00 100.00 Sales
73.22 74.60 65.42 73.46 74.83 69.87 Cost of sales
26.78 25.40 34.58 26.54 25.17 30.13 Gross profit
3.56 4.64 4.01 5.54 5.58 4.85
General &
Administrative
Expenses
3.99 5.20 6.57 7.56 8.88 12.37 selling expenses
3.94 2.24 1.26 0.73 0.14 0.09 Financial expenses
15.29 13.32 22.74 12.71 10.57 12.83 Net operating income
1.79 1.12 0.11 4.84 0.82 0.61
Net Revenue &other
expenses
1.45 1.71 1.71 1.41 1.06 1.10
Expenses &other
expenses
15.63 12.74 21.15 16.13 10.34 12.33
Profit, year before
tax provision
15.63 12.74 21.15 16.13 10.34 12.33 Net income before tax
0.27 0.28 0.67 0.68 0.49 0.16 Income tax provision
0.00 0.00 0.00 0.00 0.00 0.28
Income tax( previous
years)
15.36 12.46 20.47 15.45 9.84 11.89 Year ,profit
0.00 0.00 0.00 0.00 0.00 0.00 Minority rights
15.36 12.46 20.47 15.45 9.84 11.89
Net income of
shareholder
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We notice from the vertical analysis of the income statement the following :
1- The profit in the year 2005 was 20.47% and this was the highest ratio of profit
during the years (2003-3008), and this refers to the great reduction of the sales’ cost .
First : Analyzing Liquidity Ratios :
The liquidity ratios aimed to evaluate the company’s financial capability for short term
through measuring the company’s capability to meet its short term commitments when they
are due .
Table (7)
Financial ratios analysis
2008 2007 2006 2005 2004 2003 Liquidity ratios
5.24 3.69 3.24 2.14 0.99 0.70
Current Ratio =
current assets /
Current liabilities
3.68 2.45 2.12 1.36 0.64 0.45
Quick Liquidity Ratios =
(current assets-
inventory)/current
liabilities
1.55 0.33 0.52 0.04 0.01 0.00
Cash ratio =cash +
marketable securities /
current liabilities
3,957,203 2,969,933 2,642,337 1,974,474 33,749- 1,267,150-
Net Working Capital =
current assets -
current liabilities
We notice from the table that liquidity rations were higher in 2008 than it was in the previous
years , and this means the following :
1- Current ratios : the company’s ability to cover its current liabilities
2- Quick Liquidity Ratios: the adequacy of sources of cash and cash equivalent in the
company I meeting its short term commitments.
3- Cash ratio : the company’s assets of cash are the most liquid assets in the company
and therefore the company depends basically on them to fulfill its commitments
especially if the company could not Liquidate other assets.
4- Net working capital: the current assets increased rapidly which led to an increase in
the current liabilities .
And according the management accountant’s point of view , the analysis of the
liquidity ratios clarifies that the company has the ability to meet its commitment on time
,cover its liabilities but it should be known the extent of the company’s preservation of
the amount of the current assets especially the cash to face its commitments and the
increase of cash in the company may lead to the risk of not utilizing the current assets.
And the current assets ratios should be the double of the current liabilities so as the
company can meet its commitments on time .
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Second : The Analysis of Profitability Ratios :
The profitability ratios reflect the extent of efficiency by which the company takes its
Investment decisions and measures the extent of the company management efficiency in
achieving profit on the sales , assets and the owners’ rights.
Table (8)
Financial Ratios Analysis
2008 2007 2006 2005 2004 2003 Profitability Ratios
0.09 0.05 0.08 0.13 0.06 0.14
return on assets = Net profit+ Interest Expenses ( 1 - tax
ratio /)average total assets
0.09 0.06 0.09 0.15 0.08 0.10
Return on owners' equity = net profit /average of
owners' equity
We conclude the following from Profitability Ratios:
1- Return on Assets was high in 2003 where it was 0.14% and there was not a
continuous increase in the ratio.
2- Return on equity was high in 2005 with 0.15% and there was not a continuous
increase in the ratio.
based on this ,the company did not take its decisions in achieving the profit on sales
efficiently.
According to the management accountant’s point of view , it is necessary to know the
reasons of the fluctuation of the profit ,to know the company’s production and the sales’
volume and to identify the most effective production lines and to control the least effective
production lines to find out the reasons for this fluctuation and to use the modern methods to
determine the cost of products as the method of activity based costing instead of the
traditional methods and this in turn reduces the costs.
Third: Analyzing Debt Ratios
Debt ratios measure the extent of the company’s dependence on others’ money to finance its
needs.
Table (9)
2008
2007 2006 2005 2004 2003 Debt ratios
0.08 0.09 0.10 0.14 0.22 0.33
Debt Ratio / shareholders’ equity =total of liabilities /
shareholders’ equity
0.00 0.00 0.00 0.00 0.00 0.05
Long term debt ratio/shareholders’ equity =long term
shareholders ’equity /shareholders’ equity
It is noticeable from the debt ratios the following : the company reduced its dependence
on others in financing its needs which means risk reduction which the company may it face in
case it did not fulfil its commitment to others. And according to the administrative
accountant’s opinion , the debt ratios are considered as a good indicator to the extent of the
company’s dependence on others money in financing its needs which means the company’s
capability to use its resources properly , to expand its business and dept repayment without the
need to borrow from others.
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Fourth : Analyzing Activity Ratios
Activity ratios are called Assets Management Ratios and it measures the efficiency of the
company’s management in distributing its financial resources properly for all types of assets
and its efficiency in using its assets to produce as much as possible of goods and services .
Table (10)
Activity Ratios
2008 2007 2006 2005 2004 2003 Activity Ratios
20.55 19.16 12.08 10.38 14.15 9.79
Turnover of goods / day =balance average of
goods * 360 / goods cost
79.95 108.81 97.45 80.44 84.78 44.55
average collection period /day =Average accounts
receivable
* 360 / net annual sales
0.30 0.25 0.27 0.35 0.25 0.27 Profitability ratios = total profit /net of sales
0.13 0.11 0.13 0.23 0.13 0.15 Net profit ratio /sales =net profit /net sales
0.12 0.10 0.16 0.21 0.13 0.16
Profitability ratios =net profitability before
interest ,tax ,revenues,& other expenses) /)net sales
4.50 3.31 3.69 4.48 4.25 8.08
Account receivable turnover =net sales /account
receivable average
17.52 18.79 29.81 34.68 25.45 36.75
Turnover of goods =cost of goods sold /balance of
goods
2.57 2.24 2.92 8.38
-
10.86
-
10.77
Net working capital turnover =net sales /net
working capital
0.74 0.52 0.53 0.60 0.49 0.90
Total assets turnover =net assets /average total
assets
We notice the following from the analysis of activity ratios:
1- Turnover of goods was in 2008more than it was in 2003, and this is a good indicator of
the extent of the efficiency and the effectiveness of the inventory management where
the turnover inventory increased , the better it was .
2- The collection period was higher in 2007 where it reached 108.81% while it increased
in 2008 to be 79.95% and this is not a good indicator because this percent indicates
the extent of the efficiency of credit management and the extent of the efficiency of
the credit and collection policies .
3- Net Working Capital Turnover was in an increase during the years 2003-2008 where it
increases in 2008 to be 2.57% while it was 10.77% in 2003, and this indicates the
efficiency of the company’s management of Net Working Capital.
4- It is noticeable that the ratios’ analysis regarding the profit varied during the years
2003-2008, where it was not in a continuous increase and this refers to what the
company and sales achieved .
And according to the administrative accountant’s opinion of the analysis of the activity
ratios that there is instability in the efficiency of the company management in distributing its
financial resources for all different types of assets and its efficiency in using its assets to
produce as much as possible of goods and services so the company has to get benefit of
managers and management accountants who are specialized to help the company to use its
sources efficiently so as to achieve high returns.
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Fifth : Analyzing Market Ratios
Table (11)
Market Ratios
2008 2007 2006 2005 2004 2003
Market Ratios
0.90 1.03 1.10 1.63 1.57 1.88
Market value ratio /book value=market share price/book
value per share
0.00 0.00 0.07 0.07 0.05 0.00
return distribution ratio = earnings per share /Share
market
We notice from analyzing the market ratios the following :
1- Market value ratio /carrying value is considered as an indicator to evaluate the
investors of the company and it is expected that the investors to pay higher than the
carrying value to the company’s shares.
2- Return distribution ratio : used to judge on investment opportunities.
Based on this, we notice that Market ratios of the company fluctuated which is
considered as a negative indication that leads to a decrease in the number of investors
in the company and the opportunities in the company as well.
And according the administrative accountant the company has to increase its profits so as
to increase the share’s profit and so there will be an increase in the return distribution ratios ,
and this gives a positive image of the company to the investors which increase the company’s
investments , its profits and its sales.
4. Results and Recommendations:
4.1 Results of the study were as follows :
The management accountant has a role in the process of evaluating the performance , and
there is an effect of using deviation analysis in the National Chlorine industries co.ltd that
helps in identifying the causes of these deviations and therefore to adjust them. And there are
no obstacles prevent using the deviation analysis in the National Chlorine industries co.ltd
because it is easy to detect the deviation through using simple methods as financial ratios.
Based on these results, the researcher recommended the following :
It is necessary that the National Chlorine industries co.ltd pays attention of increasing its
profits through increasing its sales and this can be achieved by controlling production lines
and know which line achieved the highest production and which one achieved the lowest
one and to find solutions. It is also necessary to pay attention of providing employees who
are qualified scientifically and practically to implement the work of the company properly
by utilizing and developing the available resources . It is important to establish an
independent management accounting department to evaluate the performance of the
company through deviation analysis in order to treat these deviations as the moment they
occurred and to overcome them . The company has to provide and develop its software to
complete the work in short time and save effort and labors.
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