Accounting and Finance Trump Ltd - Assignment Example

Part A Trump Ltd Incomes ment For the year ended on 31-dec-06 Sales COGS(w1) Gross profit Operating expenses Rent expenses (84-3) Office expense Rates Wages and salaries Depreciation expense Audit fees Advertising expense Electricity Insurance Interest Directors salaries Net profit Tax expense Profit after tax ‘000’ 81 53 26 158 125 10 30 28 17 4 105 ‘000’ 3290 (2394) 896 (637) 259 (60) 199 Trump Ltd Balance Sheet For the year ended on 31-dec-06 Fixed assets Motor car (100-50-25) Fixtures and fittings (500-200-100) Current assets Inventory Prepaid Debtors Bank Total Assets £‘000’ 25 200 120 3 320 122 £‘000’ 225 565 £‘000’ 790 Current liabilities Creditors Dividend payable Provision for audit fee Tax expense Long term debts Bank loan Equity Share capital Retain earnings (132+199-12.5) Total Liabilities 69 12.5 10 60 250 318.5 151.5 70 568.5 790 Part A 2) Many accounting concepts has been covered in the preparation of financial statements such as concept of depreciation concept of prepayments concept of provisions prudent concept According to concept of prudent any income should only be record when it is receive and any expense should be record when it is virtually certain that expense will incurred. According to depreciation concept company assets have a useful life for which it likely to produce efficient goods therefore throw the use of depreciation concept company fixed assets are divided on there expected useful life and record on there net book valve which is cost of asset less depreciation charge on it. According to the accounting concept of provision any provision expense should only be recorded when any past event confirm it that its exist and any future events shows that the provision expense will lead to economic outflow and provision for which amount can reliable measure. According to prepayments concept amount paid in advance for any expense will be treat as an asset until the expense is utilized. Normally prepayments are made for items like rent of premises and payments are of current nature expense. Discussion on cash flow forecast: First it necessary to define what is cash flow statements. Cash flows are useful addition to financial statements which describe the users that how much cash is there in the company. The statement shows the users that how much cash is out flowed and how much the company has received from there different activates. The main advantages of using cash flow forecast are as follow As we know that any company survival in the fast changing and tough competition environment, depend upon its ability to generate cash. cash flow accounting direct our attention toward this curtail issue. Cash flows are more comprehensive than accounting profits which are dependent on accounting concepts and conventions Cash flows forecast are easier to prepare and as well as more useful the profit forecast. Cash flows full fill the needs of all users. Such as management will able to take more effective decision when they will know that what amount of cash will be present in the company. Management will be help through the cash flow forecast in taking expansion and investment decisions. Cash flow forecast will be helpful for providing comparison with actual cash flows to see what variances has been incurred. Cash Flow Statement as on 31 Dec 2006 Month 1: Operating Activities cash from customers 6250 cash paid to staff wages -10000 interest paid ( 7% of 100000)/12 -583 cash generated from operating activities   -4333 Investment Activities purchases -30000 purchases lease on premises -100000 cash generated from investing activities   -130000 Financing Activities cash from capital 50000 cash from loan 100000 cash generated from financing activities   150000 Net Cash Flow 15667 Month 2: Operating Activities cash from customers(18750+6250) 25000 cash paid to staff -10000 cash paid for sundry expenses -8000 cash generated from operating activities   7000 Fianacing Activities interest paid -583 Net Cash Flow 6417 Monthly cash flows for the 3, 4, & 5 month are the same as the cash flow for the 2nd month Month 6: Operating Activities cash flow from customers (18750+6250) 25000 cash paid to staff -10000 cash paid for sundry expenses -8000 cash generated from operating activities   7000 Financing Activities interest paid -583 dividend paid -40000 cash generated from financing activities   -40583 Net Cash Flow -33583 Monthly cash flows for the 7, 8,9,10 & 11 month are the same as the cash flow for the 2nd month Month 12: Operating Activities cash flow from customers (18750+6250) 25000 cash paid to staff -10000 cash paid for sundry expenses -8000 cash generated from operating activities   7000 Financing Activities interest paid -583 repayment of loan -10000 dividend paid -40000 cash generated from financing activities   -50583 Net Cash Flow -43583 Summary of Cash For the Year Ended 31 Dec 2006 Operating Activities cash from sales/customers 300000 cash paid to staff -120000 cash paid for sundry expenses -96000 cash generated from operating activities 84000 Investing Activities purchases of assets -30000 purchase of lease -100000 cash flow from investing activities -130000 Financing Activities   cash from capital 50000 loan 100000 interest paid -7000 loan repayment -10000 dividend paid -40000 cash flow from financing activities 93000 Net Cash Flow 47000 Part B 1) British Airways NOTE: There are four type of ratios in which a company can be evaluated. I will be using these four types of ratios to evaluate the British airways. Profitability ratios Efficiency ratios Liquidity ratios Investor ratios 2007 2006 Profitability ratios: Net profit margin = PBIT x 100 Sales Asset turnover = Revenue Total assets-current liabilities 4.3% 1.09 times .3.7% 0.93 times Efficiency ratios: Debtor’s turnover period Creditors turnover period 30days 43days 33days 47days Liquidity ratios: Current assets ratio = Current assets Current liabilities Gearing ratio = Prior charge capital Total capital 0.94 times 1.32 1.06 times 1.93 Investor ratios: Earning per share {Market share price use (5.60:5.20)} P/E ratios 0.372 0.066 0.401 0.077 Comments on profitability ratios Net profit ratio The net profit margin ratio tells us the amount of net profit per £1 of turnover a business has earned. That is, after taking account of the cost of sales, the administration costs, the selling and distributions costs and all other costs, the net profit is the profit that is left, out of which they will pay interest, tax, dividends and etc. one of the many factors affecting profit margin is depreciation, which is open to considerable subjective judgment. There is a favorable amount of increase in net profit margin of British airways this is because company may able to control its operating expenses as compare to past year for example British airways depreciation and amortization expense has decrease to 714m from 715m. Assets turnover ratio: These are ratios which shows how effective a company is utilizing its assets, how much effective products are made through there assets usage. Profitability ratios shows that asset turnover ratio provide fruitful figures as compare to last year. British airways has effectively be using there assets. Comment on efficiency ratio: Debtor’s turnover period: Debtor’s turnover ratio provides the days in which cash are received from the customers or sales are realized. The ratio is helpful in indications of credit policy adopted by the company. The turnover period will provide the detail to what extend companies credit customers will able to pay their dues. Company debtors period indicate fall in three days as compare to previous financial year Which indicate company may me using good credit policies which are tracking customers to avail discounts. Company might have used the facilities of factoring to recover debts. Creditor turnover period: This turnover period shows when company is able to meet its current debts. This represent the credit period which a company has taken from its suppliers British airways again have shown efficiency in creditor turnover period. Company period is shorter then pervious year period there is at least four days difference between them. Shorter period indicate that company does not have a going concern or any liquidity problems. its also indicate company credit rating is good and company consider and give importance to maintain its credit rating so it can obtain supplies from different suppliers. Short period also indicate that company is not extensively investing in investment projects, which can be consider a bad sign if company want to expanded. Comment on liquidity ratio: Current asset ratio: The current asset ratio measures the adequacy of current assets to meet short-term liabilities. It reflects whether the company is in the position to meet these liabilities as they fall due. Traditionally, a current ratio of 2:1 or higher was regarded as appropriate for most of business to maintain there creditworthiness; however, more recently a figure of 1.5:1 is regard as normal. Company vary in there size complexity and activities so it might be different for same business organization but having different size. Here the British airways show weakness in meeting its current liabilities. Current asset ratio has fallen from past year. This indicates that company currents assets are not enough to meet is upcoming liabilities. This will result in loosing reputation in market. Company credit limit will be increase. Company will have to use their cash convertible to finance there liabilities. Gearing ratios: The gearing ratios are calculated to see what proportion of total asset is financed by equity ratio and what by loans. Gearing ratios also help the investor to see how much a company is drowned in loans. Company having high gearing might lead to its liquidation or it may cause going concern problems. Here company gearing has been decrease as compare to previous year. Which shows that British airway is meeting its long-term debts. high finance cost in its P/L statement also reflect that. Comments on investor ratios: EPS: Earning per share is one of the most popular ratios among investor. This shows how much return or the investor will earn on its investment. EPS is also use in the calculation of price earning ratio commonly known as E/P ratios. The company EPS has been decrease to some extend. This might be due to issue of shares during the years EPS may be restated due to dilutions of shares. Dilution might be caused my exercise of share options. P/E ratios Price earning ratios are the most important ratios of stock market which is use to calculate market share price. This ratio also helps in indicating company growth or expansion ability. The higher the P/E ratios the faster the growth the market expecting In the company’s future. Here the price earning ratio has fallen to some extend. This might be fall in share price from last year. Last year the highest bit was 10.85 and lowest was 5.20 and this year the bit is 5.60. Approximately half of share price has been fallen. 2) Type of finances use by company It’s has been observed that company has used both medium of financing debt and equity together. But most of the assets are financed through debts financing. As looking at the balance sheet long terms debts Shows Company most of assets are leased through finance lease. Company finance cost for the year is also significant expenditures. Such as interest payments and repayment of leases. How ever British airways also use the method of equity financing through the use of share options and bonus shares. Diluted EPS indicate these situations that share options were provided and are exercised. 3) Discussion Financial and Non-Financial factors effecting the performances of the company Non-financial factors: If we look at previous week’s news headlines we can easily make a suspicious view of British railways. British airways has faced problem like blame of engine failures for the crash-landed at Heathrow Airport on Thursday. British airways plan had to make emergency landing at the same airport at same date. The report says three people were in juried It’s also facing tough competition from other airlines like emirates. Corporate failure of maxjet also destroyed the reputation of British airways. Bad reputation has also affected it share price which has been fallen. investors interest can be loss if company on going performance will still remain same and these corporate news like blames of engine failure if are likely to come in future. Financial factors: Financial factors such as bank loans, interest payments and credit limit from suppliers can be affected adversely if company performance remains the same. Because company is extensively relying on debt financing .company is paying high finance cost which is minimizing its profits. Blames such as the engine failure blame on British railways can rise to bear legal cost. Rise of competition may lead to obtain more loans to diversify. Read More