Din Textile Limited Proj

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Din Textile Mills Limited

ANA AKHLAQ

08U0561

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Executive Summary

The project is an attempt to analyze the financial position of DIN Textiles Limited by

calculating some important ratios which will help gain an understanding into reasons for

and effects of the trends followed in various financial statements over the period FY09-

FY11, (with the last year ending on June 30, 2011) .This will help us in generating operating

results and determining the financial position of the company. Din Textiles is a public

limited company incorporated in Pakistan and is listed on Lahore Stock Exchange and

Karachi Stock Exchanges. Din Textiles Limited has consistently provided high quality,

branded products and also is an exporter of the textiles from Pakistan.  In addition,

comparisons over time and with other companies in the industry are made. After analyzing

ratios and interpreting them, we can conclude that in the FY09 was the worst for the

company as profits declined due to the economic recession that hit the entire country but

still the company managed to regain in FY10 and FY11.

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Din Textile Mills Limited

Income Statements

Year 2011 Year 2010 Year 2009

Net Sales 7,708,743,247 4,691,884,420 3,712,392,008

Cost of products sold -6,099,469,105 -3,767,900,161 -3,324,877,658

Gross Profit 1,609,274,142 923,984,259 387,514,350

Distribution costs -219,763,163 -195,200,541 -115,091,974

Administrative expenses -91,677,177 -80,810,935 -43,720,551

Other Operating Expenses -56,637,058 -31,954,167 -11,082,788

Other Operating (income) 14,569,747 11,486,916 9,735,260

Operating Profit 1,255,766,491 627,505,532 227,354,297

Finance cost 330,083,322 213,463,132 142,461,027

(loss)/profit before tax 925,683,169 414,042,400 84,893,270

Taxation -74,331,658 -54,163,213 -52,346,390

Provision for Taxation

Profit after taxation 851,351,511 359,879,187 32,546,880

Earnings per share- basic and diluted – rupees 41.77 19.42 1.76

Weighted Average of Common Stock Share 20381889.18 18,531,369 18492545.45

(Analysis)

The net income of the company shows an increasing trend over the five years, however it

declined in year 2009 but again it boosted up in year 2010 and 2011. These rising net

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incomes are the result of increasing sales of the company at a rate that is higher than at

which the total costs of the company have increased over time. The Gross profit of the

company also increased over the five years. It is due to sales increasing more than the

increase in cost of goods sold. The company’s share value increased because EPS increased

with the passage of time which shows that the company’s performance is improving over

the years.

Balance Sheets

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Year 2011 Year 2010 Year 2009

Assets

Non Current assets

Property, Plant and Equipment 1,637,141,349 1,670,162,349 1,736,468,468

Capital work in Progress

Long term loans and Advances 373,300 671,344

Long term Deposit 13,340,008 12,194,682 6,429,363

Total Non Current assets 1,650,481,357 1,682,730,331 1,743,569,175

Current Assets

Stores and spares Part and Loose Tools 183,799,894 140,651,363 105,354,466

Stock in trade 1,798,763,867 864,829,665 515,264,284

Trade Debts 1,000,964,780 547,899,636 560,982,844

Loans and Advances 874,219,423 90,106,436 193,507,133

Trade deposits and short term prepayments 4,117,850 2,462,807 2,077,356

Other receivables 141,611 163,824 8,592,642

Income Tax and Sale Tax 63,972,483

Advance Income Tax-Net 23,143,692

Tax refunds due from the Government 66,774,334

Cash and bank balances 57,830,178 24,665,598 14,403,051

Total current assets 3,986,611,937 1,734,751,812 1,423,325,468

Total assets 5,637,093,294 3,417,482,143 3,166,894,643

Current Liabilities

Trade and other payables 327,572,961 243,632,210 182,032,808

Accrued Mark up and Interest 86,235,600 44,455,705 27,681,243

Short term Borrowing 2,486,195,450 1,050,725,072 1,052,565,863

Current Portion of

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Long term Financing 129,543,818 88,793,818 106,325,743

Long Term Financing from Director and Others 250,000,000

Liabilities against assets subject to finance lease 13,848,202 13,928,746 11,471,459

Total Current Liabilities 3,043,396,031 1,691,535,551 1,380,077,116

Working Capital 943,215,906 43,216,261 43,248,352

Total Capital Employed 2,593,697,263 1,725,946,592 1,786,817,527

Non - Current Liabilities

Long term Financing 173,849,939 143,393,757 64,245,675

Long term Loans from directors and others 500,000,000

Liabilities against assets subject to finance lease 24,067,681 16,307,416 19,496,461

Deferred liabilities

Retirement benefits- obligation 64,972,067 49,728,712 52,008,160

Deferred taxation 53,967,522 53,967,522 48,397,233

Total non-current liabilities 316,857,209 263,397,407 684,147,529

Contingencies and Commitments

Equity

Share Capital and Reserves

Authorized Capital

50,000,000(2010: 50,000,000) ordinary shares of 10

each 500,000,000 500,000,000 500,000,000

issued, subscribed and paid-up capital 203,833,530 185,303,210 185,303,210

Reserve 2,073,006,524 1,277,245,975 917,366,788

Total Owner Equity 2,276,840,054 1,462,549,185 1,102,669,998

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Total Equity and Liabilities 5,637,093,294 3,417,482,143 3,166,894,643

(Analysis)

The Balance Sheet of Din Textiles Ltd for the three years showed an increasing trend in the

company’s Assets. The Non Current Assets declined over the years. This could be mainly

the result of selling of some plant assets as their value declined over time. The long term

loans declined from 2009 to 2010 which shows that some assets have been sold off due to

the payment of loans. However, the Current Assets increased over the years which were

mainly because Cash and Bank balances showed an increasing trend till in all the 3 years

except for 2009, where it declined.

On the other hand, the company’s total owner equity also increased over the years as a

result of raising Shareholders Investments and Reserves. The long term liabilities show a

fluctuating trend. It declined continuously till 2010, which means that it is attributed to

repayment of long term financing by the firm. However it increased in 2011, due to less

long term loans. The total current liabilities showed an upward trend over these five years.

This is due to the rapidly increasing accounts payable.

Statement of Cash Flows

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Year 2011 Year 2010 Year 2009

Cash flows from operating activities

Profit Before Taxation 925,683,169 414,042,400 84,893,270

Adjustments for :

Depreciation 165,919,661 170,199,061 187,216,792

Staff Retirement benefit- Gratuity 30,731,800 17,815,405 17,868,608

Provision for Doubtful Debts 6,000,000 9,397,112 6,000,000

Workers Profit participation fund 48,720,167 21,791,705 4,468,067

Finance Cost 330,083,322 213,463,132 142,461,027

Loss/ (gain) on disposal of property, plant and

equipment -13,781,754 -2,779,883 -3,021,679

567,673,196 429,886,532 354,992,815

Profit before working capital changes 1,493,356,365 843,928,932 439,886,085

Increase) / Decrease in current assets

Store, spare parts and Loose tools -43,148,531 -35,296,897 9,316,525

Stock in Trade -933,934,202 -349,565,381 44,002,000

Trade Debts -459,065,144 3,686,096 -150,023,106

Loans and Advances -784,112,987 103,400,697 -104,382,506

Trade Deposits and Short Term Prepayments -1,655,043 -385,451 1,045,194

Other Receivables 22,213 118,351 -1,333,294

-2,221,893,694 -278,042,585 -201,375,187

(Decrease)/ increase in Current Liabilities

Trades and Other payables 67,502,137 35,993,866 32,688,972

Cash generated from/ (Used) in operations -661,035,192 601,880,213 271,199,870

Finance cost paid -288,149,314 -196,607,942 -136,777,510

Tax paid -88,092,229 -72,854,452 -26,547,095

Dividend Paid -36,665,155 -1,350 -2,780,622

Workers Profit participation fund paid -21,872,433 -4,522,343 -6,966,333

Staff Retirement benefit- Gratuity paid -15,488,445 -20,004,853 -11,152,896

Net Cash generated from/ (Used) in operations -1,111,302,768 307,889,273 86,975,414

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Cash Flows From Investing Activities

Proceeds from sale of Property, Plant and equipment 19,398,825 5,346,500 6,522,109

Fixed capital expenditure -138,515,732 -106,459,559 -27,999,878

Long term loans and advances 373,300 298,044 812,256

Long term Deposit -1,145,326 -5,765,319 -2,686,200

Net Cash Used in Investing activities -119,888,933 -106,580,334 -23,351,713

CASH FLOWS FROM FINANCING ACTIVITIES

Long Term Financing 71,206,182 61,616,157 -342,837,500

Long Term loan from directors and others -250,000,000 -250,000,000

Liabilities against asset subject to finance lease 7,679,721 -731,758 -11,300,971

New Cash flows from financing activities -171,114,097 -189,115,601 -354,138,471

Net increase/ (Decrease) in cash and equipments -1,402,305,798 12,103,338 -290,514,770

Cash and cash equivalents at the beginning of the year -1,026,059,474 -1,038,162,812 -747,648,042

Cash and Cash equivalents at the end of the years -2,428,365,272 -1,026,059,474 -1,038,162,812

CASH AND CASH EQUIVALENTS

Cans and Bank balances 57,830,178 24,665,598 14,403,051

Short term borrowings -2,486,195,450 -1,050,725,072 -1,052,565,863

-2,428,365,272 -1,026,059,474 -1,038,162,812

(Analysis)

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The three years cash flows of the company presented that Din Textiles ltd has fluctuating

net cash from operating activities due to sharp rise and fall from cash generated in

operations. The major change took place due to increase in long term prepayments, loans,

Trades and Other Payables. The net cash used in investing activities was also in negative

for all the years and had fluctuating trends. It was due to fixed capital expenditures and

long term deposits. The net cash used in financing activities also shows a fluctuating trend

over the years. Cash at the end of the year is also fluctuating for all the years and shows a

negative balance, which shows that the company does not have enough cash to finance its

Operating, Investing and Financing activities.

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Common-Size Income Statement

Year 2011 Year 2010 Year 2009

Net Sales 100.00% 100.00% 100.00%

Cost of products sold 79.12% 80.31% 89.56%

Gross Profit 20.88% 19.61% 10.44%

Distribution costs 2.85% 4.16% 3.10%

Administrative expenses 1.19% 1.72% 1.18%

Other Operating Expenses 0.73% 0.68% 0.30%

Other Operating (income) 0.19% 0.24% 0.26%

Operating Profit 16.29% 13.37% 6.12%

Finance cost 4.28% 4.55% 3.84%

(loss)/profit before tax 12.10% 8.82% 2.29%

Taxation 0.96% 1.15% 1.41%

Provision for Taxation - - -

Profit after taxation 11.04% 7.67% 0.88%

(Analysis)

The exhibit presents all the income statement components as a percentage of the net sales

of Din Textiles Ltd. The cost of sales showed a fluctuating pattern over the three years

resulting in a fluctuating Gross Profit Margin. The operating profit increased over the five

years, however a fall came in 2009 but it again increased in 2010 due to increase in gross

profit ratio. The Net profit as a percentage of sales decreased drastically till 2009, being

lowest in that year, but it again increased which showed good signs for the company’s

profitability.

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Common-Size Balance Sheets

Year 2011 Year 2010 Year 2009

Assets

Non Current assets

Property, Plant and Equipment 29.04% 48.87% 54.83%

Capital work in Progress

Long term loans and Advances 0.01% 0.02%

Long term Deposit 0.24% 0.36% 0.20%

Total Non Current assets 29.28% 49.24% 55.05%

Current Assets

Stores and spares Part and Loose Tools 3.26% 4.12% 3.33%

Stock in trade 31.91% 25.31% 16.27%

Trade Debts 17.76% 16.03% 17.71%

Loans and Advances 15.51% 2.64% 6.11%

Trade deposits and short term prepayments 0.07% 0.07% 0.07%

Other receivables 0.003% 0.005% 0.27%

Income Tax and Sale Tax 0.00% 1.87% 0.00%

Advance Income Tax-Net 0.00% 0.00% 0.73%

Tax refunds due from the Government 1.18% 0.00% 0.00%

Cash and bank balances 1.03% 0.72% 0.45%

Total current assets 70.72% 50.77% 44.94%

Total Assets 100.00% 100.00% 100.00%

Current Liabilities

Trade and other payables 5.81% 7.12% 5.75%

Accrued Mark up and Interest 1.53% 1.30% 0.87%

Short term Borrowing 44.10% 30.74% 33.24%

Current Portion of

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Long term Financing 2.30% 2.59% 3.36%

Long Term Financing from Director and Others

0.00% 7.31% 0.00%

Liabilities against assets subject to finance lease 0.25% 0.40% 0.36%

Total Current Liabilities 53.99% 49.46% 43.58%

Working Capital 16.73% 1.31% 1.36%

Total Capital Employed 46.01% 50.55% 56.41%

Non - Current Liabilities

Long term Financing 3.08% 4.19% 2.03%

Long term Loans from directors and others 0.00% 0.00% 15.79%

Liabilities against assets subject to finance lease 0.43% 0.47% 0.62%

Deferred liabilities

Retirement benefits- obligation 1.15% 1.45% 1.64%

Deferred Taxation 0.96% 1.57% 1.53%

Total non-current liabilities 5.62% 7.68% 21.61%

Contingencies and Commitments

Equity

Share Capital and Reserves

Authorized Capital

50,000,000(2010: 50,000,000) ordinary shares of 10 each -------- ------ --------

issued, subscribed and paid-up capital 3.62% 5.42% 5.85%

Reserve 36.77% 37.37% 28.97%

Total Owner Equity 40.39% 42.79% 34.82%

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Total Equity and Liabilities 100.00% 100.00% 100.00%

(Analysis)

The common size balance sheet illustrates that the non-current assets of the company as

the percentage of its total assets showed a declining trend over the years which was mainly

due to a fall in the Value of the Non- Current Assets. The current assets as a percentage of

total assets increased over the years due to an increase in inventories and loans and

advances as a percentage of total assets. The total owner’s equity as the percentage of total

assets showed instability throughout the period. It increased and decreased alternately

over the years. However the total long term liabilities/total assets decreased while the total

current liabilities/total assets increased over the years.

Trend Index of Selected Accounts

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Year 2011 Year 2010 Year 2009

Cash & Cash Equivalents 674.81% 287.82% 168.07%

Accounts Receivables 283.63% 155.25% 158.96%

Temporary Investments 0.00% 0.00% 0.00%

Inventory 278.99% 134.14% 79.92%

Total Current assets 346.05% 150.58% 123.55%

Total Current liabilities 263.99% 146.73% 119.71%

Working Capital -114799.25% -5259.87% -5263.78%

Plant Assets, Net 81.61% 75.67% 89.23%

Other Assets 286.87% 270.27% 152.70%

Long Term Debt 19.73% 15.92% 58.19%

Total Liabilities 147.98% 86.09% 90.90%

Shareholder's Equity 255.47% 164.10% 123.72%

Net Sales 283.98% 172.85% 136.76%

Cost of Products Sold 251.93% 155.63% 137.33%

Administrative Expenses 260.01% 229.19% 124.00%

Marketing & Sales Expenses 36.88% 333.77% 67.57%

Interest Expense 241.01% 155.86% 104.02%

Total Cost & Expenses 499.81% 418.18% 230.70%

Earnings Before Taxes 1022.51% 457.35% 93.77%

Net Income 511.79% 216.34% 19.57%

The trend index indicates that the cash and cash equivalents for Din Textiles limited

increased over the years except for 2009, but the accounts receivable and inventory

showed a similar pattern as both declined till 2009 but again increased in the preceding

years, hence leading to a rising trend in total current assets. The finance cost increased

sharply over the years which show us a bad sign for the company. Total costs and expenses

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of the company have also increased in comparison to the base year. The net sales of Din

Textiles are increasing as compare to the base year which is a good sign for the company as

more revenue is being generated.

Short-Term Liquidity Analysis

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Units Measure Year 2011 Year 2010 Year 2009

1 Ratio Current Ratio 1.31 1.03 1.03

2 Ratio Acid-Test Ratio 1.31 1.03 1.03

3 Times Accounts Receivables Turnover 9.95 8.46 7.59

4 Times Inventory Turnover 4.58 5.46 6.19

5 Days Days' Sales Receivables 36.17 42.54 47.42

6 Days Days' Sales in inventory 78.60 65.93 58.16

7 Days Approximate Conversion Period 114.77 108.48 105.58

8 Percent Cash to Current Assets 1.45% 1.42% 1.01%

9 Percent Cash to Current Liabilities 1.90% 1.46% 1.04%

10 Times Liquidity Index 167.73 140.30 98.31

11 $Thousand Working Capital 943,215,906 43,216,261 43,248,352

12 Days Days' Purchases in A/P 19.33 23.28 19.71

13 Days Average Net Trade cycle 95.44 85.20 85.87

14 Percent

Cash Provided by Operations to

Average. Current Liabilities -46.94% 20.05% 6.51%

(Analysis)

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Liquidity ratios are a set of

ratios that measure a

company’s ability to pay off

its short-term debt

obligations. This is done by

measuring a company’s liquid

assets against its short-term

liabilities. In general, the

greater the coverage of

liquidity assets to short-term liabilities, the more likely it is that a business will be able to

pay debts as they become due while still funding ongoing operations.

Current ratio is current

assets/current liabilities so

a figure greater than one

would indicate that current

assets are greater than

current liabilities and the

company has the capacity

to cover its short term

obligations with current

assets.

Acid-test ratio is a more sophisticated alternative to the current ratio, which measures the

most liquid current assets excluding inventory but including accounts receivables and

certain investments.

Year 2011 Year 2010 Year 20090

0.2

0.4

0.6

0.8

1

1.2

1.4

Series1Acid-Test Ratio

Year 2011 Year 2010 Year 20090

0.2

0.4

0.6

0.8

1

1.2

1.4

Series1Current Ratio

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While comparing the firm’s liquidity position with that of the other firms in the industry it

can be clearly inferred from the high current and acid ratio test ratios of Din Textiles ltd in

comparison to the industry averages that the liquidity position of the firm is stronger as of

the other firms. However, this company has high days sales in inventory, day’s sales in

accounts receivable and liquidity index than that of an average in comparison to other

firms which indicates a poor liquidity position of the company.

The current ratio of Din Textiles Limited has been close to one over the five year period

implying that the company has just enough assets to cover its current liabilities. The

current ratio improved due to decline in current liabilities. Whereas the acid test ratio also

shows a good liquidity position over the three years which means that the company

without inventory liquidation would not be able to pay back its short term obligations. The

accounts receivable turnover declined in 2009. This decline could be a result due to

company’s inclination towards conservative credit policy for its customers. The inventory

turnover increased over the years which mean that the slight increase is indicative of Din’s

declining operational efficiency with growth in net sales lagging behind the growth in

inventory kept by the company. The days’ sales in receivables showed significant

fluctuations over the three years period. It increased in 2009 and again decreased in 2010

and 2011. Days’ sale in receivables was at its peak in 2009 which can be attributed to the

longer credit time period allowance to its customers in that year. The days’ sales in

inventory showed a declining trend over the years with a peak in 2009 due to higher idle

stocks. The approximate conversion period didn’t show major changes over the five years.

It was almost constant signifying that the time taken by the company to convert both

receivables and inventory to cash has not changed much. The cash to current assets ratio

declined in 2009 revealing severe liquidity issue for the company as the cash balances have

reduced. However, it increased in 2010 onwards. The cash to current liabilities showed the

similar pattern as of cash to current assets. The liquidity index has fluctuated over the

three years which signifies that the liquidity of the company was unstable. The cash

available from operations shows a fluctuating trend. It was lowest in 2011, where it

showed a negative figure.

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Common-Size Analysis of

Current Assets and Current Liabilities

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Year 2011 Year 2010 Year 2009

Current assets:

Cash and Cash Equivalents 1.45% 1.42% 1.01%

Other Temporary Investments 0.00% 0.00% 0.00%

Accounts Receivable 25.11% 31.58% 39.41%

Inventories 45.12% 49.85% 36.20%

Prepaid Expenses 0.10% 0.14% 0.15%

Total Current Assets 100.00% 100.00% 100.00%

Current Liabilities

Notes Payable 0.00% 0.00% 0.00%

Payable to Suppliers and Other 10.76% 14.40% 13.19%

Accrued Liabilities 2.83% 2.63% 2.01%

Dividend Payable 0.00% 0.00% 0.00%

Accrued Income Taxes 0.00% 0.00% 0.00%

Total Current Liabilities 100.00% 100.00% 100.00%

(Analysis)

The exhibit shows that the major portion of current assets consists of stock in trade which

shows instability over the years. Accounts Receivables also follows the same pattern.

Prepaid expenses show the smallest portion of current assets which is fluctuating over the

years. On the other hand, in total current liabilities trade and other payables had a major

chunk of whole percentage. They show an increasing trend over the years except for 2011,

where it declined. Thus, this shows that the company has started to manage its creditors

efficiently, which is a good sign for the growth of the company.

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Common-Size Statement of Cash Flows

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Year 2011 Year 2010 Year 2009

Cash flows from operating activities

Profit Before Taxation -65.92% 3395.64% -29.22%

Adjustments for :

Depreciation -11.82% 1395.84% -64.44%

Staff Retirement benefit- Gratuity -2.19% 146.11% -6.15%

Provision for Doubtful Debts -0.43% 77.07% -2.07%

Workers Profit participation fund -3.47% 178.72% -1.54%

Finance Cost -23.51% 1750.65% -49.04%

0.98% -22.80% 1.04%

-40.44% 3525.59% -122.20%

Profit before working capital changes -106.36% 6921.23% -151.42%

Increase) / Decrease in current assets 3.07% -289.48% -3.21%

Stock in Trade 66.51% -2866.86% -15.15%

Trade Debts 32.69% 30.23% 51.64%

Loans and Advances 55.84% 848.01% 35.93%

Trade Deposits and Short Term Prepayments 0.12% -3.16% -0.36%

Other Receivables -0.002% 0.97% 0.46%

-158.22% 2280.28% -69.32%

(Decrease)/ increase in Current Liabilities

Trades and Other payables -4.80% 295.19% -11.25%

Cash generated from/ (Used) in operations 47.07% 4936.14% -93.35%

Finance cost paid 20.51% -1612.42% 47.08%

Tax paid 6.27% -597.49% 9.14%

Dividend Paid 2.61% -0.01% 0.96%

Workers Profit participation fund paid 1.55% -37.09% 2.40%

Staff Retirement benefit- Gratuity paid 1.10% -164.06% 3.84%

Net Cash generated from/ (Used) in operations 79.14% 2525.06% -29.94%

Cash Flows From Investing Activities

Proceeds from sale of Property, Plant and equipment -1.38% 43.85% -2.25%

Fixed capital expenditure 9.86% -873.10% 9.64%

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Long term loans and advances -0.02% 2.44% -0.28%

Long term Deposit 0.08% -47.28% 0.92%

Net Cash Used in Investing activities 8.53% -874.09% 8.04%

CASH FLOWS FROM FINANCING ACTIVITIES

Long Term Financing -5.07% 505.33% 118.01%

Long Term loan from directors and others 17.80% -2050.30% 0.00%

Liabilities against asset subject to finance lease -0.54% -6.00% 3.89%

New Cash flows from financing activities 12.18% -1550.97% -121.90%

Net increase/ (Decrease) in cash and equipments 100.00% 100.00% 100.00%

Cash and cash equivalents at the beginning of the year 73.06% -8514.18% 257.35%

Cash and Cash equivalents at the end of the years 172.92% -8414.92% 357.35%

CASH AND CASH EQUIVALENTS

Cans and Bank balances -4.11% 202.29% -4.96%

Short term borrowings 177.04% -8617.21% 362.31%

172.92% -8414.92% 357.35%

(Analysis)

The cash generated from operations fluctuated over the years. It showed a deficit till 2009

and a surplus in the preceding years that is year 2010 and 2011. In year 2010, the Net Cash

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Flow from operations was exceptionally high due to the high level of income generated

from operations. The net cash in investing activities shows a declining trend over the years,

however it remained positive, but in the year 2010, it became negative due to an

exceptionally high figure of the Fixed Capital Expenditures. The net cash in financing

activities shows a fluctuating pattern over the years. The cash and cash equivalents were

positive but declined over the years, being negative and exceptionally low in 2010. Thus,

the company faced severe cash flow problems in the 2010.

Revenue and Expense Recognition:

These financial statements have been prepared on the basis of ‘historical cost’ convention,

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Except for certain 'Available for Sale' investments which have been recognized at fair value

and recognition of certain staff retirement benefits at present value.

The preparation of financial statements in conformity with approved accounting standards,

as applicable in Pakistan, requires management to make judgments, estimates and

assumptions that affect the application of policies and the reported amount of assets,

liabilities, income and expenses.

The estimates and associated assumptions are based on historical experience and various

other factors that are believed to be reasonable under the circumstances, the results of

which form the basis of making the judgments about the carrying values of assets and

liabilities that are not readily apparent from other sources. Actual results may differ from

these estimates. The estimates underlying the assumptions are reviewed on an ongoing

basis. Revisions to accounting estimates are recognized in the period in which the estimate

is revised if the revision affects only that period, or in the period of the revision and future

periods if the revision affects both current and future periods.

IAS 23 (Amendment), 'Borrowing Costs' is effective from January 1, 2009. The amendment

requires an entity shall capitalize borrowing costs that are directly attributable to the

acquisition, construction or production of a qualifying asset as part of the cost of that asset.

The allowed alternative treatment of recognition of borrowing cost has been removed. The

company's current accounting policy is in compliance with this amendment, and therefore

there is no impact on the company's financial statements. Income and expenses to be

presented in one statement (a statement of comprehensive income) or in two statements (a

separate income statement and a statement of comprehensive income). The company has

preferred to present two statements; (a statement displaying components of profit or loss

separate income statement) and a second statement beginning with profit or loss and

displaying components of other comprehensive income (statement of comprehensive

income). Comparative information has also been re presented/re arranged so it is in

conformity with the revised standard. The amendment change only presentation aspects of

the financial statements, it has no impact on profit or loss for the year.

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Amendment to IAS - 39 Financial Instruments : Recognition and Measurement - Eligible

hedged items (effective for annual periods beginning on or after 01 July 2009) clarifies the

application of existing principles that determine whether specific risks or portions of cash

flows are eligible for designation in a hedging relationship. The amendment is not likely to

have an effect on the company's financial statements.

An item of property, plant and equipment is derecognized on disposal or when no future

economic benefits are expected from its use or disposal. Any gain or loss arising on

derecognition of the asset (calculated as the difference between the net disposal proceeds

and carrying amount of the assets) is included in the income statement in the year the

assets is derecognized. Subsequent costs are included in the asset's carrying amount or

recognized as a separate asset, as appropriate, only when it is probable that future

economic benefits associated with the item will flow to the company and the cost of the

item can be measured reliably. All other repair and maintenance costs are charged to

income during the period in which they are incurred. Depreciation on additions is charged

from the month in which the asset is acquired or capitilized while no depreciation is

charged in the month of disposal. The significant accounting policies adopted in the

preparation of theses financial statements are set out below. These policies have been

consistently applied to all the years presented unless otherwise stated.

Leases where the company has substantially all the risks and rewards of ownership are

classified as finance lease. Assets subject to finance lease are initially recognized at the

commencement of the lease term at the

lower of present value of minimum lease payments under the lease agreements and the fair

value of the leased assets, each determined at the inception of the lease. Subsequently these

assets are stated at cost less accumulated depreciation and any identified impairment loss.

The related rental obligations, net off finance cost, are included in liabilities against assets

subject to finance lease. The liabilities are classified as current and noncurrent depending

upon the timing of payments. Property, plant and equipment except for freehold land are

stated at cost less accumulated depreciation and any identified impairment loss. Freehold

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land is stated at cost less any identified impairment loss. Cost of tangible assets consists of

historical cost pertaining to erection / construction period and other directly attributable

cost of bringing the asset to working condition. Depreciation on all items of property, plant

and equipment except for freehold land is charged to income applying the reducing balance

method so as to write off historical cost of an asset over its estimated useful life at the rates

as disclosed in note 5.

Trade debts originated by the company are recognized and carried at original invoice value

less any allowance for uncollectible amounts. An estimated provision for doubtful debts is

made when there is objective evidence that collection of the full amount is no longer

probable.

Deferred tax asset and liability is measured at the tax rates that are expected to apply to the

period when the asset is realized or the liability is settled, based on the rates (and tax laws)

that have been enacted or substantively enacted at the statement of financial position date.

Provision is made annually to cover the obligation on the basis of actuarial valuation and

charged to income currently. The most recent actuarial valuation was carried on June 30,

2009 using the Projected Unit Credit Method.

Deferred tax liabilities are recognized for all taxable temporary differences and deferred

tax assets are recognized for all deductible temporary differences and carry forward of

unused tax losses and tax credits to the extent that it is probable that future taxable profits

will be available against which deferred tax asset can be utilized, except where the deferred

tax asset relating to the deductible temporary difference arises from the initial recognition

of an asset or liability that, at the time of transaction, affects neither the accounting nor

taxable profits.

Net cumulative unrecognized actuarial gains / losses relating to previous reporting periods

in excess of the highest of 10 percent of present value of defined benefit obligation or 10

percent of the fair value of plan assets are recognized as income or expense over the

estimated remaining working lives of the employees.

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The carrying amount of deferred tax assets is reviewed at each statement of financial

position date and reduced to the extent that it is no longer probable that sufficient taxable

profits will be available to allow all or part of the deferred tax asset to be utilized.

A provision is recognized in the statement of financial position when the company has a

legal or constructive obligation result of as a past event, and it is probable that an out flow

of resource embodying economic benefits will be required to settle the obligation and a

reliable estimate can be made of the amount of obligation.

Borrowing costs are recognized as an expense in the period in which these are incurred

except to the extent of the borrowing costs that are directly attributable to the acquisition,

construction or production of a qualifying asset. Such borrowing costs are capitalized as

part of the cost of that asset up to the date of its commissioning. Borrowings are recorded

at the proceeds received. Finance costs are accounted for on an accrual basis and are

included in current liabilities to the extent of the amount remaining unpaid.

Deferred tax is provided, using the balance sheet liability method, on all temporary

differences at the statement of financial position date between the tax base of assets and

liabilities and their carrying amounts for financial reporting purposes.

Provision for current taxation is based on taxability of certain income streams of the

company under presumptive / final tax regime at the applicable tax rates and remaining

income streams chargeable at current rate of taxation under the normal tax regime after

taking into account tax credit and tax rebates available, if any. The charge for current tax

includes any adjustment to past years liabilities. Liabilities for trade and other payable are

carried at cost which is fair value of the consideration to be paid in the future for goods and

services received, whether or not billed to the company.

Income tax expense comprises current and deferred tax. Income tax expense is recognized

in the income statement except to the extent that it relates to items recognized directly in

equity, in which case it is recognized in equity. The company operates an unfunded gratuity

scheme covering for all its permanent employees who have attained the minimum

qualifying period for entitlement to the gratuity.

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Revenue is recognized on dispatch of goods or on performance of services. Return on

deposits is recognized on a time proportion basis by reference to the principal outstanding

and the applicable rate of return.

The dividend distribution to the shareholders is recognized as a liability in the period in

which it is approved by the shareholders.

Where an impairment loss subsequently reverses, the carrying amount of the asset is

increased to the revised estimate of its recoverable amount, but so that the increased

carrying amount does not exceed the carrying amount that would have been determined,

had no impairment loss been recognized for the asset in prior years. A reversal of an

impairment loss is recognized as income immediately.

If the recoverable amount of an asset is estimated to be less than its carrying amount, the

carrying amount of the asset is reduced to its recoverable amount. Impairment losses are

recognized as an expense immediately.

Research and development cost is charged to income statement in the year in which it is

incurred. All transactions with related parties are carried out by the company at arms'

length price using the method prescribed under the Companies Ordinance, 1984 with the

exception of loan taken from related parties which is interest / mark up free.

Government grants for meeting revenue expenses are set off from respective expenses in

the year in which they become receivable.

A financial asset and financial liability is offset and the net amount is reported in the

statement of financial position if the company has a legal enforceable right to set off the

recognized amounts and intends either to settle on net basis or to realize the assets and the

liabilities simultaneously.

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Financial assets and financial liabilities are recognized when the company becomes a party

to the contractual provisions of the instrument and derecognized when the company loses

control of contractual rights that comprise the financial assets and in case of financial

liabilities when the obligation specified in the contract is discharged, cancelled or expired.

Any gain or loss on Derecognition of financial assets and financial liabilities is included in

the income statement for the year.

All financial assets and financial liabilities are initially measured at cost, which is the fair

value of the consideration given and received respectively. These financial assets and

liabilities are subsequently measured at fair value, amortized cost or cost, as the case may

be. The particular recognition methods adopted are disclosed in the individual policy

statements associated with each item.

Inventories

Inventory means quantity of goods and materials on hand. A manufacturer's inventory

represents those items that are ready and available for sale. Production includes those

activities involved in conceptualizing, designing, and creating products and services. In

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recent years there have been dramatic changes in the way goods are produced. Today,

computers help monitor, control, and even perform work. Flexible, high-tech machines can

do in minutes what it used to take people hours to accomplish. Another important

development has been the trend toward just-in-time inventory. The word inventory refers

to the amount of goods a business keeps available for wholesale or retail. In just-in-time

inventory, the firm stocks only what it needs for the next day or two. Many businesses rely

on fast, global computer communications to allow them to respond quickly to changes in

consumer demand. Inventories are thus minimized and businesses can invest more in

product research, development, and marketing

When corporation faces difficult times one of the first actions examined is lower inventory

investment that is, reducing the organizational slack present in the form of buffer stock.

“We must tighten our belts.”

Q Reducing working capital requirements

Q Demonstrating higher return on investment

Q Increasing profit by decreasing carrying costs

There are two types of costing system

i) Job order costing system, and

ii) Process costing

Din Textile Mills Limited use process costing.

LONG TERM FIXED ASSETS

long-term assets (those whose useful lives exceed a year) and discusses these types: land,

buildings, leasehold improvements, intangibles, vehicles and other equipment.

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Land is not a wasting asset. That is, it does not get used up over time and rarely suffers

damage such that it loses value. For that reason, it usually is recorded at cost at the time of

purchase. Appreciation in its value over decades is not recorded and is not recognized in

any way on the books of the owner. It is only after land has been sold that sale price and

purchase cost are compared to calculate gain or loss on sale.

Accepted accounting practice is to record the cost of the building determined at time of

ownership transfer (purchase) or at conclusion of all costs of construction. Because

buildings are frequently used for decades, and due to the need to be able to calculate gain

or loss on sale, accounting practice preserves the original cost by not recording declines in

value in the account containing the original purchase or construction cost.

Vehicles or Equipment of all kinds usually last for several years, but their useful lives are

much shorter than that of assets that have little movement in their functioning. Because

they do wear out over time, common accounting practice in business is to record

depreciation using life spans and depreciation methods appropriate to the nature and use

of the asset. Frequently, the life and depreciation methods chosen are influenced by what is

permitted per national tax regulations for the kind of asset being depreciated.

The mechanics of accounting (debiting and crediting appropriate accounts) for these assets

are relatively simple, much the same as for any of the above assets. Where the difficulty lies

is in their valuation, which is an advanced topic and not something that individual persons

and small businesses would likely encounter. For that reason further discussion of items

such as patents, copyrights, goodwill, etc. are left out of this Guide

During the half year under review, the turnover of the company increased substantially as

compared to the corresponding period of the preceding year. Cotton prices were higher as

compared to the corresponding period of the last year. Cost of power increase due to

increase in oil prices. Depreciation charges increased, due to the addition of the new unit,

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from Rs.32.359 million to 106.134 million. Your company earned a gross profit of Rs.

118.143 million (GP rate 9.95%).

Finance cost for the period was substantially higher due to increase in the rate of mark-up

and additional financing obtained for new unit and the working capital requirements.

Nevertheless, your company has been able to earn a profit before tax of Rs. 19.476 million.

After the reversal in deferred taxation and provision of taxation for current year, your

Company has earned a profit after taxation of Rs. 21.602 million.

This loan of Rs 800 million is secured against first pari passu hypothecation charge of Rs.

1.06 billion over all present and future overall existing and future fixed and floating assets

of the company excluding land, and is repayable in 8 equal semi annual installments of Rs.

100 million each commenced from May 26, 2006. It carries mark up at the rate of 6.00%

(June 30, 2009 : 6.00%) per annum payable quarterly, which is also the effective mark up

rate. The loan has been paid during the year.

During the year an additional loan of Rs. 23.047 million is obtained out of which Rs. 11.523

is under SBP-LTF-EOP scheme and Rs. 11.524 is under term finance facility. The new loan

is secured against demand promissory note and first pari passu charge by way of

hypothecation of Rs. 54.667 million over present and future plant and machinery of the

company inclusive of 25% margin. The loan is repayable in 12 equal quarterly installments

of Rs. 960,250 and Rs. 960,333 respectively commencing from August 2010. It carries mark

up at the rate of SBP refinance rate plus 1.5% (June 30, 2009: Nil) against SBP-LTF-EOP

and 15.24% (June 30, 2009: Nil) against term finance. The effective mark up rates

computes to 10.30% (June 30, 2009:Nil) for SBP-LTF-EOP and 15.24% for term finance.