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Ratio Analysis of Double Ink Printers Limited

Question:

Discuss about the Social Responsibility and Integrated Reporting.

Ratio analysis is the most widespread tools used by companies for analyzing a business financial standing (William, Glover and Prawitt 2016). This analysis is very easy to understand and compute that makes it so famous than any other accounting measurement tools. It is used by large and small companies for comparing their financial information. This ratio does not take into account the company size or the industry. This analysis is just a raw computation of financial position as well as performance of any business enterprise irrespective of nature and size of operations. In similar ways, this study uses ratio analysis measurement tool for predicting the financial performance of Double Ink Printers Limited. The study had used four broad categories of ratio analysis such as profitability ratio, liquidity ratio, efficiency ratio and solvency ratio (Simnett, Carson and Vanstraelen 2016).

 

Double Ink Printers Limited

 

2013

2014

2015

Gross Profit

17.55085935

16.1262086

15.1969075

Table: Gross Profit Ratio of DIPL for the year 2013, 2014 and 2015

(Source: Created by Author)

The above table and graphs portrays gross profit ratio of DIPL for three consecutive years. To that, it is noted that there had been constant decline in gross profits and this means that the company has not improved in their profitability position over these years (Sierra?García, Zorio?Grima and García?Benau 2015). In the year 2013, the gross profit ratio of DIPL arrives at 17.55, further there was slight decline of gross profit at 16.12 (2014) and finally at 15.19 for the year 2015.

 

Double Ink Printers Limited

 

2013

2014

2015

Net Profit

6.895796796

6.0779639

6.83897192

Table: Net Profit Ratio of DIPL for the year 2013, 2014 and 2015

(Source: Created by Author)

The above table and graphs portrays net profit ratio of DIPL for three consecutive years (Carson, Redmayne and Liao 2014). To that, it is noted that there had been decline in net profit from 2013 to 2014 and then there was increase in net profit for the year 2015.  In the year 2013, the net profit ratio of DIPL arrives at 6.89, further there was slight decline of net profit at 6.077 (2014) and finally increase at 6.83 for the year 2015.

 

Double Ink Printers Limited

 

2013

2014

2015

Return on assets

18.24586234

14.4075478

11.3667738

Table: Return on assets Ratio of DIPL for the year 2013, 2014 and 2015

(Source: Created by Author)

The above table and graphs portrays return on assets ratio of DIPL for three consecutive years. To that, it is noted that there had been constant decline in return on assets and this means that the company has not improved in their profitability position over these years (Cohen and Simnett 2014). In the year 2013, the return on assets ratio of DIPL arrives at 18.24, further there was slight decline of return on assets at 14.40 (2014) and finally at 11.36 for the year 2015.

 

Double Ink Printers Limited

 

2013

2014

2015

Return on Equity

25.78349727

21.2484827

24.2617459

Profitability Ratio

Table: Return on equity Ratio of DIPL for the year 2013, 2014 and 2015

(Source: Created by Author)

The above table and graphs portrays return on equity ratio of DIPL for three consecutive years. To that, it is noted that there had been decline in return on equity for the year 2013 and 2014 and then increase in return on equity for the year 2015. In the year 2013, the return on equity ratio of DIPL arrives at 25.78, further there was slight decline of return on equity at 21.24 (2014) and finally at 24.26 for the year 2015.

 

Double Ink Printers Limited

 

2013

2014

2015

Current Ratio

1.424851

1.466559

1.500731

Table: Current Ratio of DIPL for the year 2013, 2014 and 2015

(Source: Created by Author)

The above table and graphs portrays current ratio of DIPL for three consecutive years. To that, it is noted that there had been constant increase in current ratio and this means that the company has improved in their liquidity position over these years. In the year 2013, the current ratio of DIPL arrives at 1.42, further there was slight increase of current ratio at 1.46 (2014) and finally at 1.50 for the year 2015.

 

Double Ink Printers Limited

 

2013

2014

2015

Quick ratio

0.827976

0.944834

0.847273

Table: Quick Ratio of DIPL for the year 2013, 2014 and 2015

(Source: Created by Author)

The above table and graphs portrays quick ratio of DIPL for three consecutive years. To that, it is noted that there had been increase in quick ratio from 2013 to 2014 and then decrease for the year 2015 and this means that the company has improved in their liquidity position over these years. In the year 2013, the quick ratio of DIPL arrives at 0.82, further there was slight increase in quick ratio at 0.94 (2014) and finally at 0.84 for the year 2015.

 

Double Ink Printers Limited

 

2013

2014

2015

Inventory Turnover ratio

12.50228261

11.8366586

8.815931109

Table: Inventory turnover Ratio of DIPL for the year 2013, 2014 and 2015

(Source: Created by Author)

The above table and graphs portrays inventory turnover ratio of DIPL for three consecutive years. To that, it is noted that there had been constant decline in inventory turnover and this means that the company has not improved in their efficiency position over these years. In the year 2013, the inventory turnover ratio of DIPL arrives at 12.50, further there was slight decline of inventory turnover at 11.83 (2014) and finally at 8.81 for the year 2015.

 

Double Ink Printers Limited

 

2013

2014

2015

Debt to equity ratio

0.413115

0.474816

1.134444326

Table: Debt to equity Ratio of DIPL for the year 2013, 2014 and 2015

(Source: Created by Author)

Liquidity Ratio

The above table and graphs portrays debt to equity ratio of DIPL for three consecutive years. To that, it is noted that there had been constant increase in debt to equity and this means that the company has not improved in their solvency position over these years. In the year 2013, the debt to equity ratio of DIPL arrives at 0.41, further there was slight increase in debt to equity at 0.47 (2014) and finally at 1.13 for the year 2015.

Analytical approach can be used by the auditor where they can analyze the results that widely influences audit planning function. Ratio analysis had been used in the case study as it provides information and depicts the financial position of DIPL for the year ending 30th June 2015. It is necessary for the auditor to evaluate the financial health of DIPL after identifying favorable and unfavorable changes by using ratio analysis as a point of reference. It is important for an auditor to compare ratios for three consecutive years and then interpret the information for evaluating the capacity of business to find out whether business can meet short-term or long-term obligations. As far as profitability ratio is concerned, DIPL had not at all improved in terms of profitability for the year 2015. The company had seen decline in their profits that give rise to going concern issues faced by the company (Eilifsen et al.2013). As far as liquidity ratio is concerned, DIPL had shown improvement in terms of liquidity for the year 2015. DIPL faces increased financial risk over the three consecutive years. It is all about the disclosures that are related to risk and need proper information mentioned in the reports (Crockett and Ali 2015)As far as efficiency ratio is concerned, DIPL has not improved in terms of efficiency. The company engages in proper writing back allowances for any loss that prevails in their stocks. It is important to check over the inventory performance allowance for such validity of actions (Junior, Best and Cotter 2014).

Double Ink Printers Limited

Risk

Material misstatement in the financial statement

Financial risk

The risk that takes place within a business when the company could not pay off their long-term liabilities within the stipulated time frame (Knechel and Salterio 2016)

DIPL was involved in manipulating their financial records in order to maintain current ratio and debt to equity ratio as desired by the lending company.

For this reason, DIPL should inflate their current assets by increasing values of receivables or inventory so that current assets are properly maintained and the company can pay off day-to-day expenses. It is also necessary for the company to inflate the equity valuation through increased value of retained earnings so that the company can maintain agreed debt to equity ratio in the near future (Lenz and Hahn 2015).

Information technological risk

The risk that takes place when any business decides to implement information technology. This decision can even have negative impact if there is deficiency in the informational technology control at any point of time (Louwers et al. 2015).

DIPL could not balance between new accounting system and existing accounting software. This led to issues that relates with improper recording of transactions within stipulated time frame. The company failed to follow accounting concept of periodicity as that had adversely affected the company such as getting access to inaccurate results and unfavorable profitability position. As well (Rahim and Idowu 2015).

Risk factors

Material misstatement in the financial reporting

Debt covenants

DIPL faced several risk while operating the business such as debt covenants. Finance Department of DIPL was in huge pressure as they had to find ways where the company can meet various debt covenants. A loan of 7.5 million had been taken by DIPL from BDO Finance Limited in the year 2015 on main two conditions. If DIPL failed to cover any of the conditions, then the loan will be taken back by BDO Finance Limited. In order to maintain current ratio, DIPL had inflated the current assets. The company had even manipulated with retained earnings figures that are not acceptable any time.

Nature of control environment

DIPL had faced several risks while operating the business such as nature of control environment. This risk factor directly link to the fact that there are some fraudulent activities practices in the financial statement of DIPL. This can be poor defined job description or poor segregation of work among the staff members. The company even manipulates with the stock figures by showing less stock at the time of cash arrival. Overall, there is improper system used by the company and efforts need to be made to mitigate the fraudulent activities as far as possible.

  • Effect of debt covenants on audit plan- In order to meet the debt covenants, DIPL should balance their current assets and current liabilities. They need to decide whether there is any inflation present in current assets or deflation present in current liabilities. It is important for the company to involve in careful verification of retained earnings.
  • Effect of control environment on audit plan- In order to have a control over the environment, DIPL should keep a balance of stock so that there is no excess or shortage of it as both are not favorable condition. It is important that the quantity of orders placed for the stock purchase and stock received should match. The company should not engage in any of the manipulation activities as that will worsen the overall environmental factors of business enterprise.

Reference List

Carson, E., Redmayne, N.B. and Liao, L., 2014. Audit market structure and competition in Australia. Australian Accounting Review, 24(4), pp.298-312.

Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A Journal of Practice & Theory, 34(1), pp.59-74.

Crockett, M. and Ali, M.J., 2015. Auditor independence and accounting conservatism: Evidence from Australia following the corporate law economic reform program. International Journal of Accounting & Information Management, 23(1), pp.80-104.

Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.

Junior, R.M., Best, P.J. and Cotter, J., 2014. Sustainability reporting and assurance: A historical analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), pp.1-11.

Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.

Lenz, R. and Hahn, U., 2015. A synthesis of empirical internal audit effectiveness literature management pointing to new research opportunities. Managerial Auditing Journal, 30(1), pp.5-33.

Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.

Rahim, M.M. and Idowu, S.O. eds., 2015. Social Audit Regulation: Development, Challenges and Opportunities. Springer.

Sierra?García, L., Zorio?Grima, A. and García?Benau, M.A., 2015. Stakeholder engagement, corporate social responsibility and integrated reporting: an exploratory study. Corporate Social Responsibility and Environmental Management, 22(5), pp.286-304.

Simnett, R., Carson, E. and Vanstraelen, A., 2016. International Archival Auditing and Assurance Research: Trends, Methodological Issues, and Opportunities. Auditing: A Journal of Practice & Theory, 35(3), pp.1-32.

William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.

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