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Discuss About The Fundamental Cornerstones Of Managerial Accounting.

Purpose

Financial analysis is the procedure of evaluating and analysing the financial statements of the company. It deals with the examination of accounts prepared by the organization at the end of the accounting period. Generally, the analysis conducted is used by the investors and management to make correct and appropriate decisions regarding the concerned entity (Fridson and Alvarez, 2011). The report contains ratio and horizontal analysis of Crown Resorts Limited and then compares the performance of the company with its competitor Skycity Entertainment Group.

The purpose of the report is to provide insights to its users about the financial performance and position of Crown Resorts for the past two years. Ratio analysis is conducted with an objective to know about the position of the firm in a nutshell. Various categories of ratios are calculated on the basis of quantitative data presented in the annual report of Crown Resorts. The main aim of horizontal analysis is to reflect the changes occurred in some specific items of company’s financial statements over the years 2016 and 2017. The changes are then compared with the analysis of Skycity for the same number of years.

Overall the objective of financial analysis is that it helps the managers, investors, shareholders and other users to have an idea about the liquidity and profitability of Crown Resorts.

The report covers the financial data of Crown Limited for the past two years and it analyses the liquidity, profitability and efficiency of the company for 2016 and 2017. Furthermore, it examines the changes in the specific items of entity’s income statement such as sales, net income, gross income, selling and administrative expenses and cost of goods sold including depreciation and amortization expenses for the years.

Following are the limitations of the analysis performed in the report:

  • It only covers the quantitative aspect and does not provide insights into qualitative aspect of both the companies.
  • The limitation of ratio analysis is that it is based on past years’ data which might prove to be unreliable and wrong.
  • The horizontal analysis takes into account only some specific items of income statement and ignores the other important factors such as interest and tax expense and line items of balance sheet.
  • Ambiguity in the data is the major drawback of the study.

Crown Resorts Limited is the leading and largest entertainment group of Australia having its core businesses and investments in resort sector. It owns and operates two leading integrated resorts in the country named as Crown Melbourne Entertainment Complex and Crown Perth Entertainment Complex. The company operates through four segments that include Crown Perth, Crow Aspinall’s, Crown Melbourne and Wagering and Online (Reuters. 2018). Both the fully owned resorts have casinos, hotels, function rooms, food and beverage outlets, shopping malls and restaurants. It is publically listed on ASX and is traded with the symbol ASX: CWN. The market capitalization of the firm is $ 9.521 billion with the share price at $13.85. As of 2018, the revenue earned by the company amounted to $ 3.49 billion with the net income worth $558.9 million (Yahoo Finance. 2018).

Current ratio

2016 ($m)

2017 ($m)

Current assets (A)

842

2,059

Current liabilities (B)

882

1,126

CR (A/B)

            0.95

            1.83

Scope

The above table shows the calculation of current ratio which is derived by dividing total current assets of Crown limited by its total current liabilities for years 2016 and 2017.

Current ratio is one of the liquidity ratios which are used to measure the financial health of the company. It basically analyse the capability of the company in meeting its short term obligations with its liquid assets. The industry benchmark for this ratio is 2:1 which means that the entity should have its assets double of its liabilities so that it can easily pay them off on time (Bragg, 2012). 

In case of Crown Limited, the ratio has been increased from 0.95 to 1.83 in the past two years. However, it was still less than the industry benchmark of 2:1. The reason for the upsurge was the significant rise in company’s current assets as compare to its CLs. The cash balance of Crown Limited increased from $ 449,663 million to $ 1,771,227 million which ultimately boosted up the ratio (Crown Resorts. 2017).

Gross profit margin

2016 ($m)

2017 ($m)

Gross profit (A)

3415.0

3099.0

Total revenue (B)

3,557

3,253

GPR (A/B)

96.01%

95.27%

The ratio is calculated by dividing the amount of gross profit with the total sales made by the firm during the year (Bragg, 2012). 

It is one of the profitability ratios which show the profit amount earned by the company out of its total revenue. It is derived after deducting the cost of sales from the figure of total sales. The gross profit is expressed as a percentage of revenue and the firm having high and increase GPR reflects greater profitability (Gibson, 2011). 

From the above table, it can be interpreted that the margin has been slightly reduced from 96.01% to 95.27% due to the decline in Crown’s gross profit over the years. This is because of the upsurge in company’s cost of goods sold from $ 142,042 million to $ 153,605 million. Furthermore, the revenue of the firm also declines to $3253 million in 2017 (Crown Resorts. 2017).

Return on Equity

2016 ($m)

2017 ($m)

Net income available to shareholders (A)

949.0

1866.0

Shareholder's equity (B)

5,062

5,141

ROE (A/B)

18.75%

36.30%

It also determines the profitability position of the company. To calculate such ratio, the net income which is available to shareholders is divided by the owner’s equity. The ROE indicates the amount of return a company offer to its shareholders for the capital invested by them in the business (Godwin and Alderman, 2012). Generally, investors see this ratio as an indicator of firm’s profitability because a high ratio means high returns and high profits. Therefore, a high ROE is favourable for the entities (Higgins, 2012). 

Limitations

Crown’s ROE has shown an upward trend as the ratio rises from 18.75% to 36.30% in 2017. This was due to the huge increase in company’s net income from $949 million to $1866 million in the year. Such upsurge indicates that despite having reduced gross profit, Crown is capable of offering high returns to its shareholders (Crown Resorts. 2017).

Return on Assets

2016 ($m)

2017 ($m)

Net profit  (A)

949

1,866

Total Assets (B)

8,849

8,553

ROA (A/B)

10.72%

21.82%

This ratio shows the portion of profit generated by total assets of the firm. It is calculated by dividing the amount of net profit with the assets of the company (Nikolai, Bazley and Jones, 2009). 

A high ROA indicates that the company is able to employ its available resources properly in order to generate more return from them. The ROA of Crown Limited has shown the same trend as its ROE. The ratio increased from 10.72% to 21.82% during the past two years. One reason for this huge upsurge was the increased net profit and other is the reduced total assets of the firm. Overall, the company has maintained a high profitability position in the market (Crown Resorts. 2017).

Days Inventory Ratio

2016

2017

Days (A)

365.0

365.0

ITR (B)

9.12

9.10

Days inventory (A/B)

            40.0

            40.1

It indicates the time taken or number of days taken by the company on an average to convert its inventory into sales. It is the indicator of firm’s efficiency and capability in utilizing its inventory for generating revenue. The ratio is calculated by taking into account the number of days and inventory turnover of the firm (Vogel, 2014). Crown’s inventory days remains almost same in 2016 and 2017 because of the slightest change in its ITR.

Crown Resorts

Particulars

2016

2017

Increase/Decrease

% change

$million

$million

$million

Sales

3,557

3,253

-304

-8.5%

Cost of goods sold including D&A

424

450

26

6.1%

Gross income

3415

3099

-316

-9.3%

Selling, general and administration expense (SG&A)

0

0

0

0.0%

Net income

949

1,866

917

96.6%

Skycity Entertainment group

Particulars

2016

2017

Increase/Decrease

% change

$million

$million

$million

Sales

999

927

-72

-7.2%

Cost of goods sold including D&A

181

164

-17

-9.4%

Gross income

922

858

-64

-6.9%

Selling, general and administration expense (SG&A)

349

341

-8

0.0%

Net income

146

45

-101

-69.2%

Horizontal analysis is a technique of financial statement analysis and is also known as trend analysis. It shows the changes in the amount of corresponding items of the statement over a period of time. It basically shows the trend followed by the company in the past years by critically evaluating the available data. Generally, the analysis is conducted for the statements of two or more than two years where the initial period is considered as the base year and then the changes are been calculated over the periods. The fluctuations are shown both in percentage and dollar form by applying appropriate formula (Heitger, Mowen and Hansen, 2007).

  • It facilitates the comparison of the line items over number of accounting periods.
  • It is useful in knowing the trend and behaviour of items like revenue, expenses and others.
  • It helps the management in taking suitable decisions for the organization by allowing them to compare different amounts over different financial periods.
  • By reflecting the trend, horizontal analysis provides insights to the managers about what needed to be changed in future (Sinha, 2012).

The above two tables show the analysis of Crown Resorts and Skycity Entertainment, the Australian companies operating in gaming and entertainment industry. When compared, it is observed that the sales made by Crown Resort have shown a decrease of 8.5% whereas the same reduces by 7.2% in case of Skycity. Furthermore, the cost of sales of Skycity reduced by 9.4% while a reverse trend was noticed in the COGS of Crown Resort. It increased by 6.1% and reaches to $450 million in 2017.

The decline in the gross income of Skycity was also less than the reduction observed in the gross profit of Crown Limited. It falls by 6.9% in 2017 whereas Crown’s GP decline by 9.3% during the same year. However, despite having such significant reductions in revenue and gross income, Crown was able to maintain its profitability by keeping its net profit margin high at $1866 million, reflecting an overall upsurge of 96.6%. So, it can be said that Crown Resorts Limited has performed better in past two years.

  • Crown should focus on cutting down its COGS so as to improve and increase its gross profit margin.
  • The company should also pay more attention on increasing its sales by delivering quality services to its customers. 

References

Bragg, S. M. (2012). Business ratios and formulas: a comprehensive guide (Vol. 577). New Jersy: John Wiley & Sons.

Bragg, S. M. (2012). Financial analysis: a controller's guide. New Jersy: John Wiley & Sons.

Crown Resorts. (2017). Annual Report. [Online]. Available at: https://www.crownresorts.com.au/CrownResorts/files/9d/9df41ad5-de12-465c-ad18-2925ad3533fa.pdf 

Fridson, M.S. and Alvarez, F. (2011). Financial statement analysis: a practitioner's guide (Vol. 597). New Jersey: John Wiley & Sons.

Gibson, C. H. (2011). Financial reporting and analysis. USA: South-Western Cengage Learning.

Godwin, N., and Alderman, C. (2012). Financial ACCT2. USA: Cengage Learning.

Heitger, D.L., Mowen, M.M. and Hansen, D.R. (2007). Fundamental cornerstones of managerial accounting. USA: Cengage Learning.

Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.

Nikolai, L. A., Bazley, J. D., and Jones, J. P. (2009). Intermediate Accounting. USA: Cengage Learning

Reuters. (2018). Crown Resorts Ltd (CWN.AX). [Online]. Available at: https://www.reuters.com/finance/stocks/companyProfile/CWN.AX 

Sinha, G. (2012). Financial statement analysis. New Delhi: PHI Learning Pvt. Ltd.

Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. New York: Cambridge University Press.

Yahoo Finance. (2018). Crown Resorts Ltd (CWN.AX). [Online]. Available at: https://finance.yahoo.com/quote/cwn.ax?ltr=1 

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