Financial Performance of Morrison Plc - Assignment Example

1. a) In order to evaluate the financial performance of Morrison Plc a financial analyst needs to utilize financial tools to evaluate the company. Ratio analysis is a good tool that can be used for this purpose. The eight ratio selected to analyze the performance of the company are net margin, return on assets, return on equity, debt to equity, current ratio, sales to asset, working capital, and quick acid ratio. The net margin ratio is useful because it determines the profitability of the company (Garrison & Noreen, 2003). Return on equity (ROE) provides information regarding how much profit the company has been able to generate in regards to its equity. A high ROE is desirable. Return on assets (ROA) tells an investor how effective a company has been at producing profits from its assets (Besley & Brigham, 2000). A high metric is the desirable output. The debt to equity ratio measures how much debt a company has with regards to its total equity. A low ratio is a good sign. The current ratio compares the current debt a company has in regards to its current liabilities. The formula is current assets divided by current liabilities. A high ratio is a warning because it’s a sign that the firm is having liquidity problems (Weygant & Kieso & Kimmel, 2002). Working capital is calculated by subtracting current liabilities from current assets. A positive working capital is the desired output. The quick acid ratio is calculated with the same formula as the current ratio except that in the numerator you must subtract prepaid expenses and inventory. The sales to asset ratio represent how much revenue a company is generating in regards to its total assets. It is important to understand that in order to perform a complete analysis of the company’s performance utilizing ratio analysis the financial analyst must perform research to obtain information about the industry standard ratio performance. b) Ratio 2008 2009 Net margin 4.27% 3.17% Return on asset 7.26% 5.59% Return on equity 12.65% 10.17% Debt to equity 1.0 1.00 Current ratio .49 .53 Quick asset .49 .53 Working capital -943 -958 Sales to asset 1.70 1.75. c) The results of the financial ratio analysis reflect that the performance of the company has declined between 2008 and 2009. The net margin, return on equity and return on assets metrics decreased in 2009. The current ratio went up by 4%. The company has liquidity problems evidence by its negative working capital for both 2008 and 2009. d) Based on the ratio analysis perform on Morrison Plc for the years 2008 and 2009 I would not invest in the company. Prior to making giving this recommendation I would need to compare the 2009 ratio results with the industry standard. A database that provides information regarding industry standard is the Dun & Bradstreet database. 2. a. The financial statements provided by Morrison Plc are not complete. The company only provided two of the four financial statements a public corporation is obligated to report. The statement of cash flow and the statements of stakeholder’s equity were not provided by the company. Another important consideration that is missing in the two financial statements illustrated is the notes of the financial statements. The notes of financial statements provide material information concerning the information provided in the statements. Two examples of note to the financial statements are accounting changes such as a switch from LIFO to FIFO or information regarding a pending lawsuit against a company. b. Based on the characteristics of the business I would recommend that the person create the business as a corporation. When a person registers a company as a corporation with the state department agency they are creating a separate business entity. The corporation eliminates the personal liability of the owner. The 25,000 loan would be taken under the corporate umbrella, thus if the business fails the owner would not be personally responsible for the debt. Another advantage of the corporation status is that it facilities the process of raising capital. The owner can sell a portion of the business by selling common stocks to potential investors. As a corporation the business could receive incentives from the government for capital investments or to cover operating expenses. Governments have incentives programs for corporations that at times pay for a portion of the base salary of new employees for a predetermined period of time or incentive programs that pay for a portion of the expenditures to buy new machinery. If the business is registered as a personal business or society it would not be entitled to these types of governmental benefits. 3. a. I do not agree with the premise that budget setting is an arbitrary process in which those that shout most get rewarded by senior managements. This assumption does not follow any principles recognized by the accounting profession. The budget setting process is performed in order to allocate resources to cover variable and fixed expensed (Kieso & Weygandt, 1998). The controller creates an operational budget to cover the accounting cycle of the company which is typically one year. Monthly operating budgets are also created which provide more specific details on how the money will be spend. The budget must consider the labor costs, rent, utility bills, material purchases, and tax considerations among other expenses. The budget planning process must be performing following the generally accepted accounting principles (GAAP). The managerial staff works with the accounting staff to formulate the yearly budget. The accountants through their accounting information system monitor if a company is following its budget by comparing the actual results with the budget projections. Variance analysis is a useful tool to compare actual vs. budgeted results. I do not agree with anything in this statement. A neutral position about the original statement is that some people that are not users of financial information might interpret that the fact some departments get more money than others has something to do with internal politics and managerial power. In reality the money is allocated based on needs and the capacity of certain departments or business units to generate more money than others. References Besley, S., Brigham, E. (2000). Essentials of Managerial Finance (12th ed.). Fort Forth: The Dryden Press. Garrison, R., Noreen, E. (2003). Managerial Accounting (10th ed.). Boston: McGraw-Hill Irwin. Kieso, D., Weygandt, J. (1998). Intermediate Accounting (9th ed.). New York: John Wiley & Sons. Weygandt, J., Kieso, D., Kimmel, P. (2002). Accounting Principles (6th ed.). New York: John Wiley & Sons. Read More