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# BIZ201 Accounting For Decision Making Assignment

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• Course Code: BIZ201
• University: Laureate International Universities
• Country: United States

## Question:

Learning Outcomes

a) Apply relevant accounting concepts to simple business scenarios.

b) Interpret and analyse the information contained in general purpose financial statements, to evaluate the overall financial position and performance of a business.

Context:

This assessment is aimed at consolidating knowledge from Modules 1-3. By prescribing this assessment, you are able to reflect on your understanding of accounting concepts and be able to apply them to business scenarios like given in this case study.

Required:

Part 1 – to be done in Excel

1. Vertical analysis of financial statements:

a. Conduct Vertical Analysis of the Crystal Hotel Balance Sheet using the Case Study Excel Workbook. The workbook is attached under Assessment Information section (AU - Crystal Hotel Case Study Workbook Part A student.xlsx). Open the Vertical Analysis Balance Sheet worksheet.

b. Conduct Vertical Analysis of the Crystal Hotel Income Statement for the year ending 30 June 2015 using – Vertical Analysis Income Statement worksheet of the same workbook (AU - Crystal Hotel Case Study Workbook Part A student.xlsx).

2. Conduct Ratio Analysis using Ratio Analysis worksheet of the same workbook (AU - Crystal Hotel Case Study Workbook Part A student.xlsx).

PART 2 – to be included in the Business report

3. Using the Income Statement Vertical Analysis prepared in Excel, conduct Income Statement comparative analysis to the industry benchmarks included in Table 1 and Table 2 of the Comment on how the business is performing comparing to the industry.Include comments on Revenue, Cost of sales (excluding personnel costs), Personnel costs, unallocated Operating Costs and Total Costs proportions.

Based on the results of your comparative analysis make recommendations on areas needing an improvement or further investigation.

4. Using the results of the Ratio Analysis in Excel, comment on Profitability, Efficiency, Liquidity and Solvency of the business. With reference to the industry data provided, make recommendations when appropriate.

5. There are additional industry specific performance indicators and benchmarks that the hotel could use when comparing itself to the industry. Conduct a research and recommend 3 additional industry specific benchmarks the hotel could use in their comparative analysis. Include a brief explanation of each benchmark you are recommending including formulas when appropriate.

### Analysis of information included in general purpose financial statement

The set of financial statements including balance sheet and income statement is called as general purpose financial statement as it includes basic financial information that can be used by various users like creditors, investors, lenders and stakeholders (Henderson et al., 2015). It can be identified that out of total assets 32.09% consists of current assets and 67.91% consists of non-current assets. Further, out of total liabilities 66% consists of current assets and 34% consists of non-current assets. However, assets of the company are financed through 26.73% of debts and 73.63% of equity.  Therefore, it can be stated that the company is highly depended on owner’s equity as compared to outside debt.

### Analysis of vertical income statement

Income statement is the financial statement that states the financial performance of the company over the specific period of time. Performance of the company is evaluated through presenting the summary regarding the way in which the revenue of the business is generated and the way in which the expenses are incurred. Looking into the income statement of Crystal Hotel Pty Ltd for the year ended 30th June 2015 it can be stated that out of total revenue major portion that is 61.88% is generated through room revenue (Wahlen, Baginski & Bradshaw, 2014). However, as per the industry data 51% of the total revenue is generally generated through room revenue. Therefore, Crystal Hotel is able to generate higher income through room charges as compared to industry. If the cost of sales is considered, it can be identified that total cost of sales for Crystal Hotel is 27.59% that results into 72.41% of gross profit. On the other hand, industry benchmark for cost of sales is 20% that will results in 80% of gross profit. Hence, the cost of sales for Crystal Hotel is higher as compared to industry benchmark (Weil, Schipper & Francis, 2013). If total personnel cost is considered, it can be identified that total personnel cost for Crystal Hotel is 25.38% of revenue. On the other hand, industry benchmark for total personnel cost is 33% of revenue. Hence, total personnel cost for Crystal Hotel is better as compared to industry benchmark. If total unallocated operating cost is considered, it can be identified that total unallocated operating cost for Crystal Hotel is 18.31% of revenue. On the other hand, industry benchmark for total unallocated operating cost is 21% of revenue. Hence, total unallocated operating cost for Crystal Hotel is better as compared to industry benchmark. Finally, if the total cost for Crystal Hotel is considered it can be recognized that total cost of the company before fixed charges amounted to 71.28% of the revenue resulting into 28.72%  operating profit or profit before fixed charges. On the other hand, industry benchmark for total cost is 74% resulting into 26% of revenue as income before fixed charges. Therefore, taking into consideration the revenues and expenses of Crystal Hotels for the year ended 30th June 2015 it can be stated that the profitability position of Crystal Hotel is better as compared to the industry data (Edmonds et al., 2013).  However, to further improve the profitability position of the company it is recommended that the company shall try to control and minimize the cost of sales as it is higher as compared to the industry benchmark. Cost of sales towards room cost and foods and beverages shall be tried to minimize as higher amount like 13.04% and 12.47% of revenue is comprised as room cost and food and beverage cost of sales respectively.

### Ratio analysis

Profitability – profitability ratios are analysed to measure the profit earning capability of the entity from revenue. Gross profit ratio states the proportion of revenue left with the entity after incurring the cost of sales. On the other hand, the net profit ratio states the proportion of revenue left with the company after incurring all the expenses including the interest expenses and tax expenses (Weygandt, Kimmel & Kieso, 2015). It can be identified that though the gross profit margin of the company is lower as compared to industry benchmark, the net profit margin of the company that 19.53% is better as compared to industry benchmark that is 11%. Return on assets states the profitability of the company as compared to total assets. On the other hand, return on equity computes the profit generated by the company on each dollar of the owner’s equity. It can be identified that return in assets as well as the return on equity of the company is better as compared to the industry benchmark (Babalola & Abiola, 2013). Return on asset of Crystal Hotels is 21.23% as against the industry average of 8%. On the other hand, return on equity of Crystal Hotels is 28.84% as against the industry average of 9%.

Efficiency – efficiency ratios are used for measuring the efficiency of the company regarding collection of its dues and replacing its inventories. Inventory turnover ratio measures the days taken by the company to sell or replace the entire stock of the inventories. It can be identified that the industry average for inventory turnover is 8.60 times whereas the company’s inventory turnover is 6.85 times. Therefore, the company is not efficient enough to replace its inventories. On the other hand, the account receivable collection period states the days taken by the company to collect its outstanding debts that is amount due on credit sales made by the company (Warren, Reeve & Duchac, 2013). It can be recognized that the industry average for collection is 35 days whereas the company takes 100.96 days to collects its dues. Therefore, the efficiency of the company with regard to collection of dues is not good as compared to the industry benchmark.

Liquidity – liquidity ratios are used to measure the ability of the company to pay off its short term liabilities with the short term assets. Current ratio is measured through comparing its current assets with the current liabilities. However, while calculating the quick ratio most liquid assets like inventories and prepaid expenses are not taken into consideration (Delen, Kuzey & Uyar, 2013). It can be identified that both the liquid ratios of the company that is the current ratio and quick ratio of the company is lower as compared to the industry average. Current ratio of Crystal Hotels is 1.86 times as against the industry average of 3.20 times. On the other hand, quick ratio of Crystal Hotels is 1.46 as against the industry average of 2.12.

Solvency – solvency ratios are used to measure the leverage position of the company. Debt to equity ratio measures the proportion of capital raised through borrowing and the proportion raised through equity. It can be identified that only 35.81% of the capital is raised through borrowing and therefore the company will be regarded as lower leveraged. Debt ratio and equity ratio states the proportion of assets financed through debt and proportion of assets financed through equity (Carraher & Van Auken, 2013). It can be recognized that 26.37% of the assets has been financed through debt and 73.63% of the assets are financed through equity. Hence, major part of the asset is financed through equity that makes the company lower leveraged. Further, the interest coverage ratio of 60 times is indicating that the company is efficient enough to meet the interest expenses out of the operating profits (Xu et al., 2014).

Therefore, it is recommended that to improve the liquidity position the company shall pay off its short-term liabilities or sell out current assets to generate cash for meeting short-term obligations. Further, to balance the capital structure the company shall raise additional fund through equity.

Various other methods those can be used by the company for comparative analysis with the industry benchmarks are as follows –

• Graphical analysis – graphs provides the visual representation of financial performance that can be compared over time easily. Various types of graphs that can be used includes column pie charts, graphs or line graphs
• Horizontal analysis – horizontal analysis can be performed to compare the performance of the company with the industry benchmark or various other companies in the same industry which in turn helps to find out the deviation. It is presented in percentage form (Kim, Kraft & Ryan, 2013). For instance if the gross profit of the company is 80 as against the industry benchmark of 100 it can be stated that the company’s gross profit is (100% - 80%) = 20% lower than the industry average.
• Trend analysis– it is used for revealing the trends of the items under specific period of time and it is used generally as the statistical tool. It is further used under horizontal analysis, vertical analysis and ratio analysis to recognize the particular trend, exploring the reasons behind particular trend and take necessary actions wherever necessary (Needles, Powers & Crosson, 2013).

## Reference

Babalola, Y. A., & Abiola, F. R. (2013). Financial ratio analysis of firms: A tool for decision making. International journal of management sciences, 1(4), 132-137.

Carraher, S., & Van Auken, H. (2013). The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), 323-336.

Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.

Edmonds, T. P., McNair, F. M., Olds, P. R., & Milam, E. E. (2013). Fundamental financial accounting concepts. New York, NY: McGraw-Hill Irwin.

Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.

Kim, S., Kraft, P., & Ryan, S. G. (2013). Financial statement comparability and credit risk. Review of Accounting Studies, 18(3), 783-823.

Needles, B. E., Powers, M., & Crosson, S. V. (2013). Financial and managerial accounting. Cengage Learning.

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.

Warren, C., Reeve, J. M., & Duchac, J. (2013). Financial & managerial accounting. Cengage Learning.

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.

Xu, W., Xiao, Z., Dang, X., Yang, D., & Yang, X. (2014). Financial ratio selection for business failure prediction using soft set theory. Knowledge-Based Systems, 63, 59-67.

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