This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
With the rapid development of economies world widely, and sequentially, with globalization, international trade has become a significant element of every economy. Therefore, export and import industry has been considerably developed to support for the smooth conduction of international trade and to satisfy the sophisticated needs of international trade. Still being a developing country, Sri Lanka, has geared up its import and export industry since last couple of decades, with the reason of successful contribution from few export and import companies. Amongst them, "Trans Orbit Logistics Pvt. Ltd," has been contributing to a substantial portion of the industry.
Trans Orbit Logistics Pvt. Ltd is delivering supply chain management solutions, including international and domestic transportation, warehousing, customs, brokerage, freight forwarding and trade consulting services. Founded in 2003, as a courier and air freight company, now it has spanned its scope of the service comprehensively by providing supply chain management solutions to the globe as well. With only seven years of history, it has been successfully operating and meanwhile forward looking for several diversifications. Currently, the company is operating with two branches, with the aim of delivering value added service.
The service delivered by the company is spanned into five major areas, concerning every aspect of the industry. The company is covering service areas as follows.
Specialized logistics - The service deals with supplying and purchasing of hazardous goods. The company provides a total solution to overcome the complexities accompanied by the movement of hazardous materials, especially through air.
Air freight logistics - The company facilitates cost sensitive air shipment needs.
Cross trade solutions - The company plays the role of third party, in terms of coordinating consignment between the client and the end user.
Sea freight logistics - The company provides comprehensive ocean freight service to and from the world's major markets.
Document logistics. - It is the service of providing fully customized logistics for industrial product manufactures.
1.1 Company vision, mission & objectives
As non assets based company our investments are made in people and systems. Through organic growth, not acquisition, we give our clients and employee's peace of mind knowing their day to day business won't be disrupted; our systems integrity is kept intact, not disrupted by companies whose business was founded on a different platform. Our customers are most interested in the quality and consistency of service we provide regardless of the country in which we're doing business.
To be the regional best manned and managed integrated supply chain Management Company, we thrive in inventions of new concepts, solutions to give our clients several options for their transportation needs.
We provide complete supply chain solutions including Customs Brokerage and Freight Forwarding, Fulfillment and E-Commerce Fulfillment, Real Estate Services, Small Parcel Delivery, Transportation and Transportation Management, Value Added Services and value added warehousing.
General Discussion on financial reporting
2.1 Financial reporting
It is a process of presenting financial data of a company's position, operating performance, and funds flow for an accounting period. Financial statements along with related information may be contained in various forms for external party use such as in the annual report, SEC Form 10-K, and prospectus.
Objectives of financial reporting
The fundamental objective of financial reporting is to provide information about the current financial status of the company. Different kinds of information seekers as shareholders, managers, employees, government etc. would require financial information in order to take decisions regarding the allocation of scare resources for various uses. Therefore, the process of financial reporting provides a comprehensive understanding about the financial performance of the company in order to assist the decision makers.
The director board and the top management of a company represent the shareholders as a whole and act as the agent of them. The utmost responsibility of the management is to manage the funds and other resources invested by the shareholders and to provide information and feedback on their investment periodically. Therefore, financial reporting delivers information regarding the utilization and the performance of the resources and funds.
2.3 Regulatory Framework of financial reporting
The regulatory framework for financial reporting can be explained as follows.
2.3.1 Companies Act no 07 of 2007
The current Company's Act no07 of 2007 was passed by the parliament in 2007, replacing the previous Company's Act no17 of 1982. It has been marked a significant mile stone in the success of Sri Lankan companies. The Act contains 534 sections, which wrap up the overall performance of the company, including the management and administration of a company.
A company incorporated under the Company Act is categorized mainly into three sections as follows,
Limited company - It is a company, which issues shares and the share holders have liability to contribute to the assets of the company.
Unlimited company -A company, which issues shares and where the shareholders have unlimited liability towards contributing to the assets of the company.
Company limited by guarantee -A company which does not issue shares, and the members of the company should undertake the contribution towards the assets in the event of the company is being liquidation, in an amount specified by the articles of the company.
A brief outline of the Company Act is as follows,
Section 148 - Duty to keep accounting records
The section 148 outlines the duty of a company which is registered under the Company Act to keep accounting records. Moreover it deals with the responsibility in recording and explaining the company's transactions accurately, and it specify following point as well,
The financial position of the company should enable to determine a reasonable accuracy at any given time.
Directors should prepare the financial statements in accordance to the Act.
The financial statements of the company should be properly audited.
Section 149 - Place where accounting records are kept
The Act outlines the accounting record of a company should be kept in Sri Lanka, either the register permits a company to keep its accounting records outside Sri Lanka under the following guidelines,
The company should ensure the accounts and the returns of the operation should disclose with a reasonable accuracy the financial position at intervals not exceeding six months.
The preparation of the financial statements should comply with the Act.
Section 150 -Obligations to prepare the financial statements
The Act emphasizes that the director board of a company should ensure the preparation of the financial statements are completed within six months or within an extended period permits by the Register after the balance sheet date of the company. And the financial statements of the company should be certified by a member of the company who is responsible for the preparation of the financial statements and dated and signed on behalf of the board by two directors.
Section 151 - Contents and the form of financial statements
The financial statements of a company should give a true and fair view of,
The state of affairs of the company as at the balance sheet date.
The profit or loss or income and expenditure as the case may be for the accounting period ending from the balance sheet date.
2.3.2 Sri Lanka Accounting Standards
Accounting standards are performed in order to maintain the uniformity in accounting standards. Currently, Sri Lanka is following Sri Lankan Accounting Standards issued accordance to the Sri Lanka Accounting and Auditing Standards Act no 15 of 1995. The Act emphasizes on the issuance of Accounting Standards under an Accounting Standards Committee which consists of 12 members as follows,
Members of the ICASL including the president
Members nominated by CIMA, Sri Lankan Division
Register of companies
Director General of CSE
Nominee of the Governor of the Central Bank
Nominee of the Federation of Chamber of Commerce and Industry
Currently, ICASL has issued 46 Accounting Standards as follows,
2.3.3 International Accounting Standards (IAS)
International Accounting Standards (ISA) was issued by the International Accounting Standards Committee Foundation (IASC Foundation). The structure of the IASC foundation can be viewed as follows.
Trustees of the IASC Foundation
Currently there are 22 trustees made up as follows,
Six trustees from North America (including Canada)
Six trustees from Europe
Six trustees from Asia
Four trustees from other areas
International Accounting Standards Board (IASB)
The trustees of the IASC Foundation have appointed 14 members to the IASB. Of the 14 members, 12 members including the chairman work as full time members, o2 members were on a part time basis. For any accounting standard issued by IASB to be approved only 07 out of 14 members should agree.
Up to 1st April 2001, IASC was responsible for issuing standards where the IASC issued the International Accounting Standards (IAS's) from 1st April 2001; IASB was handed over the responsibility of issuing the accounting standards.
IASB will issue International Financial Reporting Standards (IFRS's). Once, IASB took over the responsibility of issuing the standards they accepted the IAS's in issue with the agreement of converting the ISA's into IFRS's in the future. As at today there are 09 IFRS's in issue along with the 41 IAS's.
Specific discussion on financial reporting of Trans Orbit Logistics Pvt. Ltd.
3.1 Key stakeholders of the company
As Trans Orbit Logistics Pvt. Ltd. is small business organization, the group of stakeholders consists of few of them. Three major stakeholders can be identified as follows.
Government is mainly engaging to the business practices with the expectation of charging tax. The income tax and VAT are charging from the business. The company is liable to pay income tax and the amount of VAT to the Inland Revenue Department. The process of financial reporting allows government to identify the level of income taxation can be charged from the company and moreover it allows clarifying the transactions that have been done in order to figure out the amount of VAT to be paid by the company. Financial reports send to the Inland Revenue Department quarterly.
Financial Institutes (Banks)
The company has obtained loans from Hatton National Bank in order to proceed business functions. Moreover the company has leased all of its vehicles at Peoples Leasing Company. Therefore the financial institutes are concerning about the financial status of the company. The financial institutes are aware about the ability of the company to pay the lease amount and the loan amount. Therefore the function of financial reporting which delivers information on current financial performance of the company is useful for the financial institutes in terms of deciding to go ahead with the company with many more transactions.
The director board consists of five representatives. The structure of the board represents the Chairman, basically the Managing Director, two Directors and two shareholders who are non directors. Basically, the Chairman is engaged with the responsibility of the overall performance of the company. And the two directors are handling marketing, operations and finance functions of the company. Finally, the two shareholders represent the other shareholder as a whole in terms of influencing to the decision making process. The director board meeting is held quarterly and a report of financial analysis of last three months are handed over to the director board.
Regulatory Framework for financial reporting of Trans Orbit Logistics Pvt. Ltd.
The company is following regulatory framework which is applicable in general for all the companies in terms of preparation of financial statements and can be viewed as follows. The company does not meet any specific rules and regulations in terms of preparation of financial reports.
3.2.1Company Act No. 07 of 2007
The company is preparing its financial reports mainly in accordance to four sections out of 534 sections contained in the Act. The four sections are as follows,
Section 148- Duty to keep accounting records.
Section 149 - place where the accounting records are kept.
Section 150 - obligation to prepare financial statements.
Section 152 - contents and the form of financial statements.
3.2.2 Foreign Currency exchange rules and regulations
All the foreign currency transactions done by the company should be in accordance to the Exchange Control Act No. 24 of 1953. Furthermore all of the transactions are performed under the control level of the Central Bank and the foreign exchange management functions are exercised on behalf of the government by the Central Bank.
The company is preparing the financial reports in accordance to all the 46 accounting standards.
3. 3 Taxation
The liability for taxation has been computed in accordance with the provision of the Inland Revenue Act No. 38 of 2000.
3.3.1 Current income tax
Current income tax liability for the current period is measured on the basis of the income or the profits generated from the relevant period. The provision for income tax is computed in accordance with the prevailing tax rates.
3.3.2 Differed taxation
Differed tax is computed on the basis of liability method, on all temporary differences at the balance sheet date.
Accounting policies and procedure of preparation of financial reports
4.1 Significant Accounting policies of Trans Orbit Pvt. Ltd
4.1.1 Fundamental accounting assumptions and policies
Basis of preparation
The financial statements are prepared in accordance with the historical cost convention, whereby transactions are recorded at the values prevailing on the dates when the assets were acquired, liabilities incurred or the capital obtained .Further the financial statements are in accordance with the Sri Lankan accounting Standards laid down by the Institute of Chartered Accountants of Sri Lanka.
The liability for the taxation has been computed in accordance with the provision of the Inland Revenue Act, No. 38 of 2000 and amendments made thereto.
Post balance sheet events
All material events occurring after the balance sheet date have been considered and where necessary adjustments have been made in the financial statements.
4.1.2 Assets and bases of their valuation
Assets classified as current assets in the balance sheet are cash and those which are expected to realize in cash, during the normal operating cycle of the company's business, or within one year from the balance sheet date, whichever is shorter. Assets other than the current assets are those which the company intends to hold beyond a period of one year from the balance sheet date.
Property, plant and equipment and depreciation.
Value of property, plant and equipment are stated at cost less accumulated depreciation, provided on the basis stated in (iii) below.
Cost of property, plant and equipment is the cost of acquisition together with any expenses incurred in brining the assets to its working condition and location for its intended use. Expenditure incurred for the purpose acquiring, extending or improving assets of a permanent nature by means of which to carry on the business or to increase the earning capacity of the business is also treated as capital expenditure and included under the coast of such assets.
Depreciation is provided on a straight line method over periods appropriate to the estimated useful lives of different types of assets by applying the following percentages on their cost or revalued amounts;
Per annum %
Furniture and fittings 10
Office equipment 15
Motor vehicles and motor cycles 20
Air condition 15
No depreciation is provided in the year of acquisition while full year's depreciation is provided in the year of disposal.
Where property, plant and equipment have been financed by leasing arrangements, which transfers substantial benefits and risk of ownership, the assets are treated as if they have been purchased outright and are included in property, plant and equipment which are depreciated over the shorter of the estimated useful lives of the assets or the lease term. The capital element of the leasing commitment has been shown as an obligation under finance lease. The interest element in lease payment is absorbed into the Income Statement over the lease period.
Trade and other receivables
Trade and other receivables are stated at the amounts they are estimated to realize, provision is made where necessary for bad and doubtful debts.
Cash and cash equivalent
Cash and cash equivalent are defined as cash in hand, and bank demand deposits in bank and short- term highly liquid investments, readily convertible to known amounts of cash and subject to insignificant risk.
For the purpose of Cash Flow Statement, cash and cash equivalent consist of cash in hand, and deposits held in bank and net of short - term loans and bank overdraft.
The Cash Flow Statement has been prepared using indirect method.
4.1.3 Liabilities and provisions
Liabilities classified as current liabilities in Balance Sheet are those obligations payable on demand or within one year from the Balance Sheet date. Items classified as non - current liabilities are those obligations which expire beyond a period of one year from the balance sheet date. All known liabilities have been accounted for in preparing the financial statements.
Defined contribution plan - Defined Provident Fund and Employee Trust Fund
All employees who are eligible for Defined Provident Fund Contributions and Employee Trust Fund Contribution are covered by relevant contribution funds in line with respective status and regulations.
Revenue is matched with the related expenditure and is recognized in accordance with Sri Lanka Accounting Standards No. 29 in the following manner:
Turnovers - The turnovers represent the commission, handling, Packaging and documentation charges and are recognized upon performance of services.
Other income -on accrual basis
Gains or losses of a revenue nature resulting from a disposal of property, plant and equipment have been accounted for in the Income Statement.
All expenditure, including the following incurred in operating the business are charged against revenue in arriving at the profit or loss from operations.
All expenses incurred in the day-to-day operating of the business.
All expenses incurred in respect of business development.
Finance cost - Interest expenses are recognized as an expense in the period in which they are incurred.
Procedure of preparation of financial statements
With the rapid expansion of the company during last year, the company tends to shift to computerized accounting system from manual accounting system. Currently, the company uses the Tally Accounting package. Even though the company is using an accounting package the manual system still prevails.
As the company deals with freight service, courier service, shipping and customer clearance, the company is using job costing system to figure out the cost of each transaction. Once a transaction is confirmed by the client the transaction is given a job number and included in the job register. The revenue and expenditure relevant to each job is recorded in the accounting package and in the manual system as well. The main source of income is from freight forwarding and courier service and main expenses related to each job consist of job handling expenses, documentation expenses, custom fees, transportation, freight charges etc. general overheads are entered into the accounting package separately and recorded in the manual system as well. The final analysis of total expenditure and revenue is computed quarterly through the accounting package and prepare a report to the top management. The results of the manual system are analyzed weekly by the Financial Controller of the company.
Weaknesses of the existing financial reporting function and recommendations
Some issues have been incurred with the implementation of a computerized accounting system recently. The issues can be listed down as follows.
The computerized accounting system is not updated.
Currently, the system is not providing up-to -date accounting information. This is mainly because of the entering of past records are still ongoing and the manual system is still existing along with the computerized system. Furthermore, it is because of the lack of staff members to handle the accounting function with a specified knowledge on accounting packages.
A comprehensive financial analysis is not carried out.
The company is only focusing on maintaining and preparing the financial statements (balance sheet, income statement, statement of changes in equity and the cash flow). Apart from preparation of basic statements, the company is not evaluating the financial status through ratio calculation. Profitability ratios, gearing ratios and efficiency ratios are not calculated due to prevailing issues. Nevertheless, the calculation of ratios depicts the reality of financial performance and it will allow to the stakeholders to take up their decisions with a more accurate view of the company. Moreover, currently the company has taken a reasonable amount of loans; therefore the calculation of gearing ratio will provide a more detailed analysis.
Following options can be introduced as to overcome the above issues.
Train the existing staff members to handle the computerized accounting package efficiently.
Recruit another employee to the finance department.
Start up calculating the ratios which allows to a comprehensive financial analysis.
Basically the report consists of the fundamental overview of financial reporting and how the financial reporting is carried out in an organization.
The process of financial reporting is dealt with communication of information to various stakeholders. Financial reporting allows the stakeholders to take up decisions regarding the company. And the basic objectives of financial reporting are to facilitate to the decision making process and to perform management accountability.
The regulatory framework for the process of financial reporting consists of rules and regulations which should be considered when preparing the financial statements. The Company Act, SLAS's, IAS's are some of regulations that should be performed during the financial reporting process.
Trans Orbit Logistics Pvt. Ltd. Is a company which delivers the service of freight forwarding, and courier service etc. The report delivers the fundamental idea about financial reporting of the company. Furthermore identifies prevailing drawbacks of the process and potential suggestions are recommended as well.