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Discuss about the Management Accounting Upper Saddle River.

  1. Ratio analysis helps provide an insight into the financial performance of the company. In the given case we are provided with some ratios of company for two financial years, from which we need to determine the credit worthiness of the company. From the ratio analysis of two years we can see that the company has earned lower profits in the current year, nut the liquidity position of the company is in a good state. The benchmark for current ratio is 2 and the company has the ratio of 2.1. This shows high liquidity and availability of funds for repayment of loan. The ratios paint a kind of favourable picture for the credit worthiness of the company, but taking the decision solely based on ratios will not be correct. it is important that we consider qualitative information regarding company also, in order to have a complete picture. It is important we also see other aspects of the business so that its real position can be understood.
  2. The above ratios give us an idea of the liquidity and profitability of the company. there are few other ratios too which will help us analyse the company’s worth:
  • Debt to equity ratio: this ratio helps us calculate the ratio of debt and equity involved in the capital structure. This gives us the idea on how much debt is already used by the company. Taking the general capital structure of the industry to which company belongs we can see if more debt would be suitable for the company or not. Based on the existing debt history of the company, the repayment history can be analysed for future performance of the company.
  • Interest coverage ratio: the interest coverage ratio helps us analyse the earnings of the company. It helps us evaluate the company’s ability to earn eng profits to pay back the interest accrued. This ratio calculates the number of times is the earnings of the interest expense. Higher the ratio better it is. It is important to check the company’s profitability before sanctioning of any loan. The company should have a secure financial health so that it can secure the lenders of the repayment of loan and interest expense.(Atkinson, 2012)
  • Debtor turnover ratio: this is a kind of efficiency ratio that will help us understand the cash flow of the company from its debtor. Higher turnover ratios indicate that the company will have its fund stuck with the debtors for higher period. Company needs to make policies in order to ensure regular flow of funds from debtors in order to ensure liquidity.
  1. Though ratio analysis is a very essential tool which helps in taking financial decisions, it also has a few limitations:
  • Ratio analysis is based on past performance, it s not necessary that the past performance will be continued by the company in the near future
  • The figures of the financial statement fail to incorporate the inflation rates, which will affect the future financial status of the company.
  • There may be changes taking place in the management of the company or in the shareholding which are likely to affect the operations, ratio analysis fails to incorporate effects of decision like these on the financial performance of the company.
  • Interpretation of ratio analysis is not a easy task. It is important that the data form ratio analysis is interpreted properly in order to have correct results.
  • Few of the ratios involve figures from the balance sheet. We should keep in mind that these figures are on the last date of the balance sheet. These figures keep changing and so does the financial viability of the company.

Items

2017

2016

2015

2014

2013

Net Sales

4,555.20

4,350.90

3,222.20

2,943.70

3,080.30

Profit After Tax

966.20

1,166.20

919.90

 799.30

462.90

Increase in Revenue with respect to 2013

47.88

41.25

 4.61

-4.43

 -

Increase in Profit with respect to 2013

108.73

151.93

98.73

72.67

 -

In the sales for the said company we have witnessed growth. A little dip in sales for the year 2014. After which the sales have shown continuous growth. Sales have grown up to 48% from 2013 to year 2017. Some portion of growth in revenue for the company is related to inflation and most of it belongs to results in operational changes.  The sudden growth of sales from 5% to 41% shows that there are some major changes made in the company which have resulted in high growth. The company has then managed maintained this growth rate in 2017. Highest growth in revenue was witnessed in with growth of 48% in sales.

After the year 2013, a high growth in profit margin was witnessed. Even though revenue fell by 4%, the net profit margin increased by 73% approximately.  The increase in profit margin may be due to operating efficiency in the organisation. It seems that the company has implemented methods to make the most out of existing resources. This has resulted in increase in profit margin by up to 109% in year 2017. Though the revenue increase was 50%, the profit margin increased by 109%. This shows some serious development on the part of the company.

  1. The following table shows the calculation for ratios:

Formula

Calculations

Profitability Ratios

2017

2016

Operating Profit Margin

EBIT / Net Sales

31/890

=

3.48

197/1485

=

13.27

Return on Assets

EBIT / Average Total Assets

31/22078

=

0.14

197/19731

=

0.998

Net Profit Margin

Net Profit / Average Total Assets

93/22078

=

0.42

141/19731

=

0.715

Return on Equity

Net Profit / Average Owner’s Equity

93/1268

=

7.33

141/1224

=

11.52

Financial Stability

           

Debt Ratio

Liabilities / Total Assets

533/1818

=

0.29

18967/20260

=

0.936

Debt to Equity

Liabilities / Equity

533/1285

=

0.41

18967/1293

=

14.67

Interest Cover

EBIT / Interest Expense

31/6

=

5.17

197/27

=

7.296

(Times Interest Earned)

           

Assets Utilization

           

Assets Turnover Ratio

Net Sales / Average Total Assets

890/22078

=

0.04

1485/19731

=

0.075


Profitability Ratios: the profitability of the company has declined from 13.27 to 3.48 from 2016 to 2017. The net profit margin for the group declined from 0.715 to 0.42. The contributors fro decline in revenue and profit was decline in business. The return in equity also declined from 11.52% to 7.33% in the current. Overall there was decline in business operations which led to low profitability.

Financial Stability: from the ratios above we can see that the balance sheet size of the group has decline drastically. The debt ratio of the company which was 0.936 times has now fallen to 0.29 times. The debt to equity ratio has declined from 14.67 to 0.41. The company has paid off its major debts which have led to decline in both debt and assets. The interest coverage ratio which used to be 7.30 times has now become 5.17 times. This is due to lower profits and lower interest expenses.

Asset utilisation: the company used to have a sale of 0.075 for every dollar spent on asset, now the company earns 0.04 for every dollar invested in asset.

  1. Ming is of the view that of the cash flow from operating activities is not equal to the earnings of the company then the company might have serious financial issues, we agree with the view of Mr. Ming. Cash flow from operating activities represents the cash flow from major part of the business. If the company does not have sufficient cash flows from its operating activities and uses most of the funds of investing and financing activities then it represents a stressful financial status. The company should have sufficient cash flow from operations, since the major part of the business lies it its operating activities. If it fails to generate cash then steps to improve operating efficiency should be taken.

Schedule of expected cash receipts from debtors

Particulars

 January

 Feburary

Cash received for sale for current month

 16,800

 15,400

Cash received for sale for last month

 -

 25,200

Cash received from debtors for sale

 16,800

 40,600

Calculation of Sales

Particulars

 January

 Feburary

Sales

 60,000

 55,000

 - Cash Sales

 18,000

 16,500

 - Credit Sales

 42,000

 38,500

Cash Budget

Particulars

 January

 February

Opening cash balance

 85,000

 1,06,800

Add: Receipts

Cash received from debtors for sale

 16,800

 40,600

Cash Sales

 18,000

 16,500

Less: Payments

Credit purchases

-

 35,000

Office salaries

 10,000

 12,500

Drawings

 3,000

 3,000

Closing Cash balance

 1,06,800

 1,13,400


The company has an instalment of $80000 due at the end of February. From the calculations above we can see that the company has a cash position of $113400 at the end of February. Also, the company requires maintaining a cash balance of $15000 in order to keep its solvency in check. Even if the company pays off its instalment of $80000, it would still have cash of $33400 left to spare.

In case if the company had shortage of cash, then they should opt for short term overdraft facilities. Therefore, the company is expected to have sufficient cash balance at the end of February in order to meet the instalment expense.

Sales Budget

Particulars

Oct

Nov

Dec

Sale - units

22000

27000

32000

Sale - Amount

121000

148500

176000

Purchases Budget

Particulars

Oct

Nov

Dec

Sale

     22,000

     27,000

     32,000

Add: Closing Stock

        8,100

        9,600

        9,000

Less: Opening Stock

        6,600

        8,100

        9,600

Purchases - Unit

     23,500

     28,500

     31,400

Purchases - Amount

94000

114000

125600

Cash Budget

Particulars

Oct

Nov

Dec

Total

Opening cash balance

     17,000

     42,200

  1,11,150

 1,70,350

Add: Receipts

Cash received from debtors for sale

        9,900

     12,100

     14,850

     36,850

Cash Sales

  1,08,900

  1,33,650

  1,58,400

 4,00,950

Less: Payments

Credit purchases

     93,600

     76,800

     94,000

 2,64,400

Closing Cash balance

     42,200

  1,11,150

  1,90,400

 3,43,750

  1. Variance analysis is the quantitative technique which helps us analyse the difference in actual and budgeted performance of the company.(Datar, 2016) Variance analysis helps maintain control within an organisation. It helps the mangers keep the costs in check. It helps them attain efficiency in operations and check on fund flow. Though variance analysis is a very useful financial tool, it has some limitations. Variance analysis is based on budgeted information. In case these budgeted figures are based on unusual assumptions, then the whole analysis will be in vain. It is important that the data used in analysis is authentic.

Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.

Datar, S. (2016). Horngren's Cost Accounting: A Managerial Emphasis. Hoboken: Wiley.

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