Financial Resource Management - Accounting Systems - Assignment Example

Topic: Financial Resource Management- Accounting Systems Dated: May 7, 2011 Introduction: Business corporations and entities execute their business plans for the achievement of financial targets within specific period generally in a business year through the utilization of resources to enhance the image of the company in the external business environment1. Financial results as reflected in the annual financial statements and reports along with management discussion and analysis2 serve as an indicator for the evaluation of the financial results and their comparison with other similar business companies. Financial ratios are tools for the interpretation of financial statements to provide a basis for valuing securities for the appraisal of financial results and management performance of the business companies. The designing and building of financial ratio calculations gives a mechanism for the financial modeling exercise for the company under consideration and to enable robust analysis through the financial results. Four types of financial ratios which include performance ratios, working capital ratios, liquidity ratios and solvency ratios help in the evaluation and analysis of the business corporations. The financial ratios for the two companies that are Higginson Chemicals Plc and Henry Group Plc for the year 2011 and its comparison with the year 2010 will provide sufficient data for the formulation of results and conclusions, the same will be helpful in revising the business strategies for the achievement of better financial results in the subsequent periods. (a) Prepare financial ratios for both years: The financial results of company one Higginson Chemicals Plc, a manufacturer of pharmaceutical products has shown a significant performance in the year 2011 as compared to that of the year 2010 assets of the company both non-current assets and current assets have shown increase as 5% increase and 46.01% increase, respectively. Equity and liabilities have also demonstrated an increase of 24.81% increase from the year 2010 to the year 2011 which reflects that the company has formulated its business strategies as on the basis of long term as well as on short term basis. The financial ratios that is a ratio between turn-over and cost of sales has shown an increase of 14% age which is less than that of an increase of 29.68% increase in the total assets of the company during the period. An increase of non-current liabilities equivalent to 26.47% is less than that of the current liabilities that is 62.4% which shows that the immediate future of the company is very tough in the business environment and in the competitive market for the pharmaceutical products. An encouraging factor for the company is that the bank over-drafts have decreased from the previous level of 152 million £ in the year 2010 which has decreased to the level of 142 million £ in the year 2011. Similarly, Trade and other payables have also decreased from the previous level of 6,643 million £ in the year 2010 to the level of 6,178 million £ during the year 2011. However, Taxation payable have increased from the level of 900 million £ during the year 2010 to the level of 1462 million £ in the year 2011 which shows that the annual turnover of the company has increased and the financial results for the year 2011 have confirmed the same as annual turnover have increased. The operating profit of the company has increased from 4111 million £ during the year 2010 to the level of 4769 million £ in the year 2011 with an increase of 16%. Similarly, the overall profit for the company has also demonstrated an increase of 25.20% in the year 2011 as compared to that of the year 2010. The financial results of company 2 with reasonable knowledge of business and economic activates in the fields of music, DVDs and books have demonstrated encouraging results as in favor of the company. The assets of the company has increased from the year 2010 to that of the 2011 from the level of 520.6 million £ in the year 2010 to the level of 637.8 million £ in the year 2011 with the increase of 22.51% both non-current assets and current assets have increased from the year 2010 to the year 2011 which shows that the administration of the company has adopted a rational and balanced strategy for the execution of the business strategy as in favor of the company. An encouraging signal for the company has been demonstrated in the shape of a decrease in the non-current liabilities that is from the level of 26.1 million £ to the level of 23.6 million £ in the year 2011. However, current liabilities have increased form the level of 496.9 million £ in the year 2010 to the level of 627. 4 million £ in the year 2011 with an increase of 26.26% which has surpassed an increase of 22.5% during the correspondence period in the total assets of the company. Although, annual turnover of the company has reached at the level of 1894.5 million £ in the year 2011 from the level of 1825.9 million £ in the year 2010 with an increase of 3%, however, the cost of sale has increased from the level of 1636.1 million £ in the year 2010 to the level of 1747 million £ in the year 2011. The review of company 1 that is Higginson Chemicals Plc with that of the company 2 that is Henry Group Plc is unfair as both the companies’ deals in different disciplines and areas of operations. However, Quick ratios that is the measures of the target’s ability to deal with obligations without selling of inventory for both the companies. The ratio is expressed as current assets minus inventories, divided by current liabilities. In the target case for company 1 is 14440 minus 3020 = 11420 divided by 7782 = 1.467 for the year 2011. The same ratio for the company during the year 2010 is 9883 minus 3022= 6861 divided by 7695 = 0.89. These results have demonstrated that the quick ratio in case of company I have improved in the year 2011 as compared to that of the year 2010. Quick ratio for company 2 for the year 2011 is as under: 1) Current assets = 358.1 2) Inventories = 210.4 Current assets – inventories = 147.7 3) Current liabilities= 627.4 147.7/627.4= 0.23 The quick ratio for the company for the year 2010 is as under: 1) Current assets = 321.9 2) Inventories = 174.1 Current assets – inventories = 147.8 3) Current liabilities= 496.9 147.8/496.9= 0.29 Quick ratio in favor of company 2 has decreased in the year 2011 as compared to that of the year 2010. b) Comments on the performance and financial position of each company The financial ratios for both the companies under review have been calculated on the basis of increase/decrease in the year 2011 as compared to that of the year 2010 and correspondence increase or decrease in the percentage of the said figures. A ratio between the total assets both non-current and current assets and current liabilities for the year 2011 and its comparison with the year 2010 provide a base for the evaluation of the financial results and financial statements of the companies under review. The information included in the financial statements help in the calculations of several ratios that measures performance of the companies during the period under review that is for the year 2011 as in its comparison with that of the year 2010. . Equity and liabilities of the company from the year 2010 to the year 2011 seems to be stagnant during the period as equity share capital have shown a nominal increase from the level of 322.9 million £ to the level of 323.0 million £, capital reserve of the company remained unchanged that is at the level of 0.3 million £ for both the years. The following items for company I need to be considered for the evaluation and review of the financial statement and performance of the company: 1) The status of assets both non-current assets and current assets: These assets have shown an increase of 29.68% from the level of 20523 million £ to the level of 25626 million £ in the year 2011. Non-current assets have increased at the level of 5% as compared to that of current assets which has shown a remarkable improvement a 46.01% in the year 2011. 2) The current ratio which is equal to current assets divided by current liabilities for the year 2011 is 14440/ 7782= 1.8555 and the same ratio for the year 2010 for the company was 9883/ 7695= 1.284. Both of these numbers are above 1 which is a positive factor for the financial health of the company which has also demonstrated that the administration has adopted a sound and competitive business strategy for running the affairs of the company in the competitive business environment. 3) The current ratio for the year 2011 for company 2 is as under: Current assets = 358.1 Current liabilities = 627.4 358.1/ 627.4= 0.57 4) The current ratio for the year 2010 for company 2 is as under: Current assets = 321.9 Current liabilities = 496.9 321.9/496.9= 0.647 In both the years the current ratio has remained lower than 1 which is a sign of weakness and bad performance on the part of the administration and the top management of the company needs to consider the financial results as an indicator for review and adjustments in the business strategy of the company in the coming years for showing good results in the competitive business environment in the field of retailer of music, DVD and books. (C) Comparison and contrast: 1. The financial results of both the companies that are the Higginson Chemicals Plc (company 1) in the field of manufacturer of Pharmaceutical the Henry Group Plc (company 20 as a retailer of music, DVD and books have been evaluated and reviewed. The financial results of company 1 are positive indicators for the administration of the company as well as for all the other stakeholders as share price at the year- end (2011) was 4870p and at March 31st 2010 was 4300p which shows a percentage increase of 13.25% in one year period. On the other hand the share price of company 2 has decreased at the closing of the year 2011 at the level of 113p as compared to that of 178p as in 2010 with a decrease of 36.51%. 2. Company 1 has registered a profit of 3830 million pound in the year 2011 as compared to that of 3059 million pound for the year 2010; an increase of 25. 20% in the period under review. Company 2 in the same period that is in the year 2011 has achieved a profit of 16.1 million pound as compared to that of 56.2 million pound for the year 2010; a decrease of 71.35 %. These results are the alarming signals for the company for making necessary changes in the business plan and its execution in the competitive business environment. 3. Cash and short term deposits are the tools for review and evaluation of the financial plan of Business Company and corporation. Cash and short term deposit for company 1 has improved from the level of 901 million pound in the year 2010 to the level of 5146 million pound in the year 2011. On the other hand , for the company 2 these figures are on the declining side as cash and short term deposits in the year 2010 was as 81.5 million pound which has reduced to the level of 77.9 million pound in the year 2011. Conclusion: The financial ratios are tools for the interpretation of financial statements and results of the business corporations for a specific time. These ratios are designed on the basis of standardized information from financial statements across a number of years. In the instant case two companies have been selected for their comparison on the basis of the financial ratios and the financial statements. The Quick ratio, the current ratio and the cash in the banks are all in favor of company 1 as compared to that of company 2 which demonstrates that the business strategy of the company 1 is competitive , sustainable and has been designed for the short term as well as for the long term business strategy as in favor of the company. References: 1. Lamb, Robert, Boyden. (1984). Competitive strategic management, Englewood Cliffs, NJ: Prentice-Hall. 2. Johnson, G, Scholes, K, Whittington, R. (2008). Exploring Corporate Strategy, 8th Edition, FT Prentice Hall, Essex, 3. Selznick, Philip.(1957). Leadership in Administration: A Sociological Interpretation, Row, Peterson, Evanston Il. 4. Ansoff, Igor, (1965). Corporate Strategy McGraw Hill, New York. 5. Levinson, J.C. (1984).Guerrilla Marketing, Secrets for making big profits from your small business, Houghton Muffin Co. New York, ISBN 0-396-35350-5. 6. Kearney, A.T. (1992). Total Quality Management: A business process perspective, Kearney Pree Inc, Appendix: Company 1: Higginson Chemicals Plc Important economic indicators Item 2011 £m 2010 £m Increase/decrease % increase/decrease Assets Non-current assets Property plant and equipment (PPE) Goodwill Intangibles other than goodwill Investments Current assets Inventories Accounts receivable – trade Accounts receivable – other Total assets EQUITY & LIABILITIES Ordinary shares of 25p each Share premium account Revaluation reserve Retained earnings Non-current liabilities 8% Bonds repayable 2010 Obligations under finance leases Provisions for liabilities & charges Current liabilities Bank overdrafts Trade & other payables Taxation payable Total Equity & Liabilities 8083 790 2,036 267 11,176 3,020 3,636 2,638 14,440 25,616 423 983 1,507 11,606 14,519 1,030 800 1,485 3,315 142 6,178 1,462 25,616 7536 833 2,051 220 10,640 3,022 3,260 2,700 9,883 20,523 400 83 1,507 8,217 10,207 303 600 1,718 2,621 152 6,643 900 20,523 547 (43) (15) 47 536 (2) 376 (62) 4557 5093 23 900 0 3389 4312 727 200 233 694 10 (465) 562 5093 7.2% -8.4% .07% 21.36% 5% 0.06% 11.53% 2.29% 46.10% 29.68% 5.75% 1084.33% 0% 41.24% 42.24% 239.9% 33.33% 13.56% 26.47% 6.57% 6.9% 62.4% 24.81% Appendix: Company 2: Henry Group plc Important economic indicators Item 2011 £m 2010 £m Increase/decrease % increase/decrease Assets Non-current assets Property plant and equipment (PPE) Goodwill Intangibles other than goodwill Deferred income tax assets Tax and other receivable Current assets Inventories Trade receivable Accounts receivable – other Prepayments Shares in Oneway plc Cash and short term deposits EQUITY & LIABILITIES Ordinary shares of 1p each Retained earnings Non-current liabilities Pension obligations Loan and other provisions Current liabilities Trade payables Other payables 169.2 71.0 2.0 30.1 7.4 279.7 210.4 12.2 13.3 44.3 - 77.9 358.1 637.8 323.0 (336.2) 22.2 1.4 239.4 88.8 161.9 - 2.0 26.6 8.2 198.7 174.1 11.1 12.1 36.3 6.8 81.5 321.9 520.6 322.9 (324.9) 25.0 1.1 236.0 75.4 7.3 71 0 47 3.5 (0.8) 81 36.3 1.1 1,2 8 (6.8) (3.6) 36.2 117.2 0.1 12.7 (2.8) 0.3 3.4 13.4 4.52% 71% .0 % 13.15% (9.7% ) 40% 20.85% 9.9 % 9.9% 22% (680% ) (4.41%) 11.24 22.51 0 % 4% 9% 18% 1.4% 17.77% Quick ratio is expressed as current assets minus inventories, divided by current liabilities. For company 1 that is for Higginson Chemicals Plc the ratio for the year 2011 is calculated as under: Current assets= 14440 Inventories = 3020 Current assets - inventories= 11420 Quick ratio= Current assets - inventories= 11420 /7782=1.467 The same ratio for the company during the year 2010 is 9883 minus 3022= 6861 divided by 7695 = 0.89. Quick ratio for company 2 for the year 2011 is as under: Current assets = 358.1 Inventories = 210.4 Current assets – inventories = 147.7 Current liabilities= 627.4 147.7/627.4= 0.23 The Quick ratio for the company for the year 2010 is as under: Current assets = 321.9 Inventories = 174.1 Current assets – inventories = 147.8 Current liabilities= 496.9 147.8/496.9= 0.29 Current ratio for company 1: The current ratio which is equal to current assets divided by current liabilities for the year 2011 is 14440/ 7782= 1.8555 The same ratio for the year 2010 for the company was 9883/ 7695= 1.284. Current ratio for company 2: The current ratio for the year 2011 for company 2 is as under: Current assets = 358.1 Current liabilities = 627.4 358.1/ 627.4= 0.57 The current ratio for the year 2010 is as under: Current assets = 321.9 Current liabilities = 496.9 321.9/496.9= 0.647 Read More