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Read through the requirements below, and then complete all parts of the assessment and then save your work as either a Word document or a PDF file. Once you have saved your work click on the Assessment submission link within this topic and upload your completed assessment to your tutor for marking.

  1. Identify and discuss the benefits and limitations of Ratio Analysis.

Ratio analysis is one of the techniques for analysing the financial data presented in the financial reports of the company. The financial ratio analysis is helpful in planning and forecasting through trend analysis; determining the efficiency of business operations; estimation of budgets using past performance; comparing the company’s performance with that of the competitors or industry average; determining the long-term solvency and liquidity of the firm; and providing important information to the users regarding the financial performance of the company.

Despite having several advantages, the ratio analysis also have certain limitations. One of the major limitations is that the information provided by the analysis is historic. The ratio analysis also fails to measure the human element in relation with the company. It does not consider external factors such as global recession while providing information. While comparing the financial ratios of past years, the changes in accounting policies are also ignored. The ratio analysis is conducted using the financial statements, now if the company reports manipulated statements, then the true condition of the company could not be known.

  1. In your own words explain the difference between Horizontal Analysis and Vertical Analysis.

One of the major difference between the horizontal analysis and vertical analysis is that the former analysis involves comparison of amounts in financial statements line by line over a certain period of time for making related decisions whereas the latter analysis involves comparison of each element in the statements by listing them as a percentage of another item from the same statement.

Horizontal analysis is conducted to compare the line items to calculate the changes over time whereas the purpose of vertical analysis is to compare the changes in terms of percentages. The vertical analysis is more useful in comparing the company’s result with another companies, probably a competitor, whereas the horizontal analysis is useful in comparing the past performance of the company.

You have been provided with a summary of the Profit & Loss data and Balance Sheet data for the past three years for Cooks & Cleans Limited (CCL).  

CCL are a home handy service that are called into people’s homes to cook and clean for them. CCL uses their own ingredients and cleaning equipment which is managed under a Periodic Inventory System.

In the past three years CCL have invested significant funds into marketing both in print and online to increase their customer base and therefore boost income.  They are wanting to employ more staff to ensure they are able to meet the demand when the expected demand for their services increase.

Cooks & Cleans Limited

Profit and Loss Statement

20X7

20X6

20X5

Sales income

Cooking & Cleaning Income

187,718

188,189

177,743

Total Income

Less Cost of Goods Sold

Opening Inventory

628

562

210

Purchases – Ingredients & Cleaning Supplies

10,895

20,365

15,585

Less Closing Inventory

(345)

(628)

(562)

Cost of Goods Sold

11,178

20,299

15,233

Gross profit

176,540

167,890

162,510

Other Income

Interest income

472

588

510

Dividend income

6,900

4,890

5,970

Total Income

183,912

173,368

168,990

Expenses

General administration expenses

2,036

1,850

1,069

Advertising

17,890

16,400

10,540

Wages

128,280

115,450

113,600

Printing, postage & stationery

263

204

198

Telephone

2,388

1,788

1,512

Rent

13,520

13,000

11,960

Vehicle expenses

4,978

3,669

3,458

Total Expenses

169,355

152,361

142,337

Net Profit Before Tax

14,557

21,007

26,653

Less Taxation Expense (12.5%)

1,820

2626

3332

Net Profit After Tax

12,737

18,381

23,321


Cooks & Cleans Limited

Balance Sheet

20X7

20X6

20X5

Current Assets

Cash

1,807

2,050

2,063

Accounts receivable

6,578

3,604

2,613

Inventory

345

628

562

Total Current Assets

8,730

6,282

5,238

Non-current Assets

Property, plant and equipment

12,917

13,460

12,790

Term Deposit

30,000

30,000

30,000

Total Non-current Assets

42,917

43,460

42,790

TOTAL ASSETS

51,647

49,742

48,028

Current Liabilities

Accounts payable

1,616

1318

1,142

Accrued expenses

380

314

298

Tax payable

1820

2626

3332

Total Current Liabilities

3,816

4,258

4,772

Non-current Liabilities

Rolling overdraft

2,090

2,100

2,500

Finance Lease - Vehicle

13,150

13,300

13,500

Total Non-current Liabilities

15,240

15,400

16,000

TOTAL LIABILITIES

19,056

19,658

20,772

NET ASSETS

32,591

30,084

27,256

Equity

Opening balance

30,084

27,256

14,500

Funds introduced

                     -

                     -

                     -

Profit / Loss

12,737

18,381

23,321

Drawings

(10,232)

(15,553)

(10,565)

CLOSING EQUITY

32,589

30,084

27,256

Using the Horizontal analysis approach, you are required to analyse the data and then highlight three areas that the owners need to look into in more detail. You must also provide a brief explanation to support each of the three areas you highlight that need to be investigated.

1.

Accounts receivable

The horizontal analysis reveals that the accounts receivable has just increased by 37.93% during the period from 20X5 to 20X6. However, it has increased largely by 82.52% during the period from 20X6 to 20X7. It shows that the company has failed to recover the amount from its customers efficiently. Therefore, the owners need to improve its collection techniques.

2.

Operating expenses, particularly vehicle and telephone expense

The company’s net profit has reduced by 30.71% and 21.18% in the year 20X6 and 20X7. The revenue of the firm does not change much in comparison with the previous year. The decline in net profit is mainly due to the increase in operating expenses. However, the company has managed to reduced the increased percentage of 73.06% increase in general administrative expenses during 20X6 to 10.05% increase in 20X7. Similarly, the percentage increase in advertising and rent expenses is less than that of previous year. The company need to focus on reducing the telephone and vehicle expenses to earn higher profit.

3.

Sales Revenue

Sales revenue is one of the most important elements for any firm. The company had been able to increase the revenue by 5.88% during the year 20X6. However, it has reduced by 0.25% in 20X7. The percentage is quite low, but the company is expected to increase its revenue with every passing year. The advertising expenses has been increased by 9.09%, which was 55.60% increase during 20X6. It means that the company is not focusing on advertising for actuating large amount of sales. Thus, the owners should think of increasing advertisement and thereby attract new customers to increase the sales revenue.

Using the financial information provided for Cooks & Cleans Limited, you are now required to use ratios to analyse the financial statements.

You may find it useful to know the following 20X4 balance sheet figures:

  • Total Assets - 44,880
  • Accounts Receivable – 2,745

CCL has also given a further break-down of their sales:

Sales Breakdown

20X7

20X6

20X5

Cash Cooking & Cleaning Income

120,140

148,669

151,083

Credit Cooking & Cleaning Income

67,578

39,520

26,660

Total Cooking & Cleaning Income

187,718

188,189

177,743

Using the following table, you MUST state the formula and provide the ratio calculations for 20X5, 20X6 and 20X7. Your final answer should be stated in the green box. In the grey box you MUST provide an evaluation and recommendation based on your findings:

Ratio

 Formula

20X7

20X6

20X5

Gross profit margin

Gross Profit

176540

167890

162510

Net Sales Revenue

187718

188189

177743

94.05%

89.21%

91.43%

Evaluation and Recommendation:

Gross profit indicates the amount of revenue left after meeting the direct expenses to cover the operating expenses of the firm. The company’s gross profit has increased from 91.43% in 20X5 to 94.05% in 20X7. It means that the company has managed to reduce its direct costs slightly and increase the gross profit of the firm. The owners can further reduce the direct costs and iprove gross profit ratio by procuring raw materials and supplies from alternative suppliers at reduced costs for bulk purchases

Ratio

 Formula

20X7

20X6

20X5

Net profit margin

Net profit after tax

12737

18381

23321

Net Sales Revenue

187718

188189

177743

6.79%

9.77%

13.12%

Evaluation and Recommendation:

The net profit margin indicates the ability of the firm to convert the revenue of the firm to the actual profit. The net profit margin of the company has been declining continuously from 13.12% in 20X5 to 9.77% in 20X6 and to 6.79% in 20X7. This is mainly due to increase in operating expenses and decline in sales revenue of the firm. It is recommended for the owners to focus on reducing the operating expenses such as vehicle, telephone and wages expenses to earn higher profit for the company

Ratio

 Formula

20X7

20X6

20X5

Current ratio

Total Current Assets

8730

6282

5238

Total Current Liabilities

3816

4258

4772

2.29

1.48

1.10

Evaluation and Recommendation:

The current ratio indicates the ability of the company to pay the short term obligations using the current assets of the firm. The current ratio of Cooks & Clean Limited is good as it is above 1. It means that the company could pay its current liabilities using the current assets easily. The current ratio has increased from 1.48 in 20X6 to 2.29 in 20X7. It shows that the company is not utilizing the current assets to the fullest.

Ratio

 Formula

20X7

20X6

20X5

Working capital

Current Assets – Current Liabilities

8730-3816

6282 – 4258

5238 – 4772

4914

2024

466

Evaluation and Recommendation:

Working capital represents the excess of current assets over current liabilities. The working capital ratio of less than 1 indicates that the company will face financial troubles in future. The working capital ratio is also known as current ratio. The working capital ratio of greater than 2 indicates idle funds that are underutilized. The working capital ratio for the year 20X5 and 20X6 can be considered as balanced ratio. It is recommended for the company to find additional bank finance and invest in advertising or other operational areas so that the profitability as well as the liquidity position of the company is improved. The working capital of the company has largely increased from 466 in 20X5 to 4914 in 20X7

Ratio

20X7

20X6

20X5

Accounts receivable turnover

67578

39520

26660

(6578+3604)/2

(3604+2613)/2

(2613+2745)/2

13.3 times

12.7 times

10.0 times

Evaluation and Recommendation:

The accounts receivable turnover ratio is measured by dividing the net credit sales by the average accounts receivable. The main purpose of calculating this ratio is to quantify the effectiveness of company in collecting the money owed by the customers. The accounts receivable turnover has increased from 10.0 times in 20X5 to 13.3 times in 20X7. However, this needs to be improved further through cash discounts and giving regular reminders to pay their debt to the customers.

Ratio

 Formula

20X7

20X6

20X5

Debtor days

 (Average Accounts Receivable)

(6578+3604)/2)*365

(6578+3604)/2)*365

(6578+3604)/2)*365

 Annual Sales

187718

188189

177743

9.90 days

6.03 days

5.50 days

Evaluation and Recommendation:

The debtor days represents the number of days taken by the company to collect debt from their customers. The average debtor days was 9.90 days, 6.03 days and 5.50 days for the year 20X5, 20X6 and 20X7 respectively. This indicates that the number of days are increasing which means that the company is taking more time for recovering its debt. However, the company can improve its collection days by making easy to pay invoices, offering several payment options such as credit cards and bank transfers.

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My Assignment Help (2022) Financial Analysis Of Cooks & Cleans Limited In Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/abki189-financial-statement-analysis/finance-accounting-management-file-A1DDF27.html
[Accessed 24 July 2024].

My Assignment Help. 'Financial Analysis Of Cooks & Cleans Limited In Essay.' (My Assignment Help, 2022) <https://myassignmenthelp.com/free-samples/abki189-financial-statement-analysis/finance-accounting-management-file-A1DDF27.html> accessed 24 July 2024.

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