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Assets turnover Given the above industry averages, comment on the company's profitability, liquidity and use of financial gearing.

  1. a) A local restaurant is noted for its fine fond, as aide-need by the large number of customers. A customer was heard to remark that the secret of the restaurant's success was its fine chef. Would you regard the chef as an asset of the business? If so, would you include the chef on the balance sheet of the business and at what value?
  2. b) Indicate the effect of each of the following transactions on any or all of the three financial statements of a business:

Statement of financial position

  1. Statement of financial performance
  2. Statement of cash flows  Apart from indicating the financial statements (s) involved, use appropriate phrases such as 'increase total asset', 'decrease equity', 'increase income', 'decrease cash flow' to describe the transaction concerned.
  3. Purchase equipment for cash.
  4. Provide services to a client, with payment to be received within 40 days.
  5. Pay a liability.
  6. Invest additional cash into the business by the owner.
  7. Collect an account receivable in cash
  8. Pay wages to employees.
  9. Receive the electricity bill in the mail, to be paid within 30 days.
  10. Sell a piece of equipment for cash.
  11. Withdraw cash by the owner for private use.
  12. Borrow money on a long-term basis from a bank.

Rate of Return on Total Assets

1. Rate of Return on Total Assets:

Particulars

Column1

Amount

Net Profit for 2014

A

4362

Total Assets for 2014

B

29935

Rate of Return on Total Assets

C=A/B

14.57%

2. Rate of Return on Ordinary Equity:

Particulars

Column1

Amount

Net Profit for 2014

A

4362

Total Ordinary Equity for 2014

B

7200

Rate of Return on Ordinary Equity

C=A/B

60.58%

3.Profit Margin:

Particulars

Column1

Amount

Net Profit for 2014

A

4362

Net Sales for 2014

B

55000

Profit Margin

C=A/B

7.93%

4. Earning per Share:

Particulars

Column1

Amount

Net Profit for 2014

A

$4,362,000

Nos. of Ordinary Shares for 2014

B

7200000

Earning per Share

C=A/B

$0.61

5. Price-Earnings Ratio:

Particulars

Column1

Amount

Market Share Price at the end of 2014

A

$12.00

EPS for 2014

B

$0.61

Price-Earnings Ratio

C=A/B

19.81

6. Dividend Yield:

Particulars

Column1

Amount

Dividends paid on 2014

A

$2,702,000

Nos. of Ordinary Shares for 2014

B

7200000

Dividends per share for 2014

C=A/B

$0.38

Market Share Price at the end of 2014

D

$12.00

Dividend Yield

D=D/C

3.13%

7. Dividend Payout:

Particulars

Column1

Amount

Dividends per share for 2014

A

$0.38

EPS for 2014

B

$0.61

Dividend Payout

C=A/B

62%

8. Current Ratio:

Particulars

Column1

Amount

($000)

Current Assets for 2014

A

12745

Current Liabilities for 2014

B

5780

Current Ratio

C=A/B

2.21

9. Quick Ratio:

Particulars

Column1

Amount

($000)

Current Assets for 2014

A

12745

Inventories on 2014

B

7000

Current Liabilities for 2014

C

5780

Quick Ratio

D=(A-B)/C

0.99

10. Receivables Turnover:

Particulars

Column1

Amount

Accounts Receivable for 2014

A

4100

Accounts Receivable for 2013

B

3675

Average Accounts Receivable

C=(A+B)/2

3887.5

Net Sales for 2014

D

55000

Receivables Turnover

E=D/C

14.15

11. Inventory Turnover:

Particulars

Column1

Amount

($000)

Inventory for 2014

A

7000

Inventory for 2013

B

6930

Average Inventory

C=(A+B)/2

6965

Cost of Sales for 2014

D

35100

Inventory Turnover

E=D/C

5.04

12. Debt Ratio:

Particulars

Column1

Amount

($000)

Total Liabilities for 2014

A

15720

Total Assets for 2014

B

29935

Debt Ratio

C=A/B

53%

Particulars

Column1

Amount

($000)

Fianance Cost for 2014

A

1560

Profit before Income Tax for 2014

B

6270

Profit before Interest & Tax for 2014

C=A+B

7830

Time Interest Earned Ratio

D=C/A

5.02

Particulars

Column1

Amount

($000)

Total Assets for 2014

A

29935

Total Assets for 2013

B

28045

Average Total Assets

C=(A+B)/2

28990

Total Revenue for 2014

D

55000

Asset Turnover

E=D/C

1.90

Profitability ratios help to measure the profit generating capability of the company. The shareholders and investors can also use it to evaluate the investments in respect to the returns, provided by the companies (Anderson et al. 2015). The profitability position of company is analysed by computing ratios such as return on total assets, return on ordinary equity and profit margin.

Particulars

Nimbin

Industry

Rate of Return on Total Assets

14.57%

22%

Rate of Return on Ordinary Equity

60.58%

20%

Profit Margin

7.93%

4%

Return on total assets of company stood at 14.57% against industry standard of 22%. Hence, it can be inferred that efficiency of company in generating profit is lower compared to industry performance.

Return on ordinary equity is computed at 60.58% that is quite higher than industry standard of 20%. Higher return generated from equity is considered favourable. Profit margin on other hand, stood at 7.93% compared to industry average of 4%. It is indicative of the fact that company is highly efficient in generating income by creating sales. Therefore, profitability position of company is favourable.

Liquidity analysis:

Liquidity ratio helps in determining liquidity position of company by looking at its current assets whether they are sufficient to meet shot-term obligations (Collier 2015). Liquidity position of company is analysed by computing current ratio, quick ratio and time interest earned.

Particulars

Nimbin

Industry

Current Ratio

2.21

2.5

Quick Ratio

0.99

1.3

Time Interest Earned

5.02

6

Current ratio of company stood at 2.21 as against industry average of 2.5. It is indicative of the fact that although the value is below industry average, the current assets has the capability of clearing off short-term liabilities of company using them. Quick ratio on other hand stood at 0.99 compared to industry average of 1.3. Value of quick ratio is lower than industry average and depicts that quick assets are not enough for making the payment or meeting short-term obligations. Time interest earned stood at 5.02 compared 6. Therefore, time interest earned for company is lower than industry average indicating the ability of company to make debt ability is less than industry. Creditors prefer higher time interest earned ratio as higher risky depicts less risky business (Salas and Campos 2016). Hence, company is required to increase this particular ratio.

Financial gearing:

Financial gearing ratio of company depicts the proportion of funds that is borrowed by company in relation to its equity. Financial stability of company has been analysed using dent ratio.

Particulars

Nimbin

Industry

Debt Ratio

53%

40%

Debt ratio of company stood at 53% compared to industry average of 40%. Higher value is indicative of the fact that company is highly leveraged compared to industry and is regarded as risky to creditors and lenders (Tinkelman 2015).

Therefore, from the above figures, it is concluded that financial stability of company is below industry average and it generates higher profit as against industry. Liquidity position is more or less in par with industry.

For the restaurant business, an excellent and fine chef can be regarded as valuable asset if they keep the customers coming back. In this particular regard, chef and their skills are intangible and the goodwill of any restaurant is represented substantially by a part of fine food as cooked by excellent chef. Restaurant selling fine food would attract customers and help in their retention by enhancing customer loyalty. This would result in increasing sales compared to their competitors and consequently scaling up their revenue. A good chef act as goodwill for ant restaurant and customers’ feedback and good experience has the possibility of increasing good will value. Therefore, in this regard, chef can be regarded as an asset of business. Chef can be included in the balance sheet of business as they act as goodwill of restaurant and it will be classified under intangible assets. For including chef in the balance sheet requires valuation of human capital. Valuation of chef can be done in terms of sales and revenue generation of restaurant that keeps them ahead of their competitors (Chen et al. 2013). Moreover, valuation can also be done in terms of salary provided to chef. This is so because representation of human skills and talent in balance sheet requires valuation in numerical terms. Restaurant can project or forecast the sales value and ascertaining the present value of future cash flow will help in such intangible asset valuation. Therefore, it can be inferred from the analysis that chef can be regarded as business asset and they can be included in the balance sheet.

Sl.No.

Transactions

Statement of Financial Position

Statement of Financial Performance

Statement of Cash Flows

1

Purchase of Equipment in Cash

Increase Total Assets

Decrease Cash Flow

2

Provides service to a client, with payment to be received within 40 days

Increase Total Assets

Increase Income

3

Pay a liability

Decrease Total Liabilities

Decrease Cash Flow

4

Invest additional cash into the  business by the owner

Increase Equity

Increase Cash Flow

5

Collect an accounts receivable  in cash

Decrease Total Assets

Increase Cash Flow

6

Pay wages to employees

Increase Expenses

Decrease Cash Flow

7

Receive the electricity bill in the mail, to be paid within 30 days

Increase Total Liabilities

Increase Expenses

8

Sell a piece of equipment for cash

Decrease Total Assets

Increase Cash Flow

9

Withdraw cash by the owner for private use

Decrease Equity

Decrease Cash Flow

10

Borrow money on a long-term basis from a bank

Increase Total Liabilities

Increase Cash Flow

References list:

Anderson, S.B., Brown, J.L., Hodder, L. and Hopkins, P.E., 2015. The effect of alternative accounting measurement bases on investors’ assessments of managers’ stewardship. Accounting, Organizations and Society, 46, pp.100-114.

Chen, W., TAN, H.T. and Wang, E.Y., 2013. Fair value accounting and managers' hedging decisions. Journal of Accounting Research, 51(1), pp.67-103.

Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

DRURY, C.M., 2013. Management and cost accounting. Springer.

Salas, O.A. and Campos, M.J.S., 2016. Finance and Accounting for Managers (Vol. 28). Profit Editorial.

Tinkelman, D.P., 2015. Introductory Accounting: A Measurement Approach for Managers. Routledge.

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[Accessed 19 April 2024].

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