Financial Statements Analysis and Budgeting - Assignment Questions

Question 1: Learning Outcome 3 (a-d): Evaluation of Financial Statements and Reporting Findings

Q 1: Learning Outcome 3 (a-d): Evaluation of financial statements and reporting findings

This questions has three parts (Q 1.1, Q 1.2, and Q 1.3), each part has sub parts and attempts to address various aspects related to financial statements analysis. Please read the instructions carefully and answer each part.

Q 1.1: You are a loan officer at Growing Debt Bank. Mary Norton, manager of Borrowers Ltd, is interested in an 8-year loan to expand the entity’s operations. The borrowed funds would be used to purchase new equipment. As evidence of the Borrowers Ltd.’s debt-worthiness, Norton provided you with the following facts:

When you told Mary Norton that you would need additional information before making your decision, she was offended, and said, “What more could you possibly want to know? You responded that, as a minimum, you need complete, audited financial statements.

Required

a. Discuss the implications of the ratios provided for lending decision you are to make. Does the information paint a favourable picture? Are these ratios relevant to the decisions?

b. List three other ratios that you would want to calculate for Borrowers Ltd, and explain why you should use each.

c. What are the limitations of ratios analysis for credit and investing decisions?

Q 1.2: The following historical information is an extract from the 2017 annual report of Foster’s Group. All figures are in millions of dollars. Use horizontal analysis to describe the trend in revenue and profits.

Required

a. Using 2013 as the base year, compare the revenue and profit to the relevant starting point (base year).

b. Analyse and explain each trend separately, and then provide an overall conclusion based on the two explained trends.

Please visit the following links and retrieve the annual reports of New Zealand Post for the year ended 2016 and year ended 2017:

Required:

a. Using information from the annual reports, calculate and analyse the following profitability, financial stability and assets utilization ratios for New Zealand Post. Your discussion must include the context and a clear conclusion regarding the profitability, financial stability and asset utilization of the company.

b. Peter Ming, a financial analyst at one of the leading brokerage house in Auckland is of the view that “Cash flow from operating activities is the critical ratio for financial decision making. If the cash flow from operations is less than the earnings figure, then the company is in a poor financial health and has poor investment prospects. Do you agree with Peter? Explain the reason for your agreement or disagreement.

Q2. Learning Outcome 4 (a, b & C): Application of management accounting tools to business decision making: Budgeting.

This questions has two parts (Q 2.1 and Q 2.2), each part has sub parts and attempts to address various aspects related to budgeting. Please read the instructions carefully and answer each part.

Required:

a. Prepare a schedule of expected cash receipts from debtors for January and February, 2018, support your answer with calculations (You must show a total column for the two months).

b. Prepare a cash budget for the two months ended February 28, 2018 showing the expected cash balance at the end of the each month (you must show a total column for the two months).

c. On February 28, 2018, the business instalment of $ 80, 000 will be due on the new machinery. Will Hamilton manufacturers be able to pay the instalment? Explain your answer with relevant calculations.

Q2.2:

Sweet Limited buys purchases marshmallows for $4 and sells them for 5.5. Sales for Marshmallows (in units) are budgeted as follows: October 22,000; November 27,000; December 32,000; and Jan 30, 000. Actual sales (in units) were: August 18,000; Sept 18,000; Sweets Limited has a target of finished inventory to be 30% of the following month’s unit sales. Sales are 90% in cash and 10% in credit. Credit customers pay the month following the sale. Payment for purchases is made two months after the date of purchase. The budgeted cash balance as at 1 October 2018 is $ 17,000.

a. Prepare a sales budget (Units and $) for the quarter ended Oct – Dec 2018 (for the months and total for the quarter
b. Prepare a purchase budget (Units and $) for the quarter ended Oct – Dec 2018 (for the months and total for the quarter)
c. Prepare a cash budget for the quarter ended Oct – Dec 2018 (for the months and total for the quarter)
d. Explain the purpose and at least one limitation of variance analysis.