Task 4 - Essay Example

Consoli d ments and Financial Performance Analysis of Introduction This paper seeks to prepare consolidated statement of financial position for Tandem Plc and its subsidiary, to prepare consolidated income statement for Paul Plc. and to prepare and compute the financial ratios of Joseph Pye Limited under three separate tasks. Task 1. Draft the consolidated statement of financial position for Tandem Plc and its subsidiary company as at 31 March 2014. Calculations for Goodwill, Non-controlling interest and retained earnings are required to be shown.

To consolidate the financial statements of the parent and the subsidiary is to prepare one financial statements for a single economic entity which would require elimination of certain accounts which are offsetting each other. Adding in 100%, line by line of the subsidiary’s the assets, liabilities, income and expenses of both companies is not the complete answer (Liong Tong, 2013). The following eliminations are needed before combining the accounts: The current assets of parent Tandem plc and the current liabilities of its subsidiary Tricycle Ltd amounting to £180,000.

In the case at hand, parent company owned 80% of the shares and to consolidate. As such, there is need first to reflect correct ownership of 20% non-controlling interest and to adjust the balance of retained earnings. Calculation of Goodwill or the excess of fair value of assets given up in exchange for fair of net assets acquired is also needed. This should occur with 80% of the subsidiary stock acquired by parent by issuing stocks. However since fair value of asset given is lower, gain on bargain purchase is the proper term.

(Gupta, 2004; Neuhausen and Schlank, 2007). Hence, the computed amount is gain on bargain purchase is £120,000 as shown not. The amount of non-controlling interest is also computed at £380,000 representing 20% of the total net assets of the subsidiary at £1,900,000 as shown in Table A below. Table A – Computation After making the needed adjustments, the consolidated statement of financial position for Tandem Plc and its subsidiary as of t March 31, 2014 is shown below.

Task 2 Draft the consolidated income statement for the parent (Paul Plc) and subsidiary companies up to including profit before tax and interest for the year ended December 31, 2014. Calculations for Revenue and Cost of sales are required to be shown. The first step to prepare the consolidated income statement is to consider beginning account balances. The second step is to make the necessary eliminations. The first adjustment is removal of the included f intercompany transaction involving subsidiary Simon Ltd having sold goods costing £36,000 to Paul Plc for £54,000 whereby two-thirds of such goods remained in inventory at the end of the year.

The dividend income by parent from subsidiary in the amount of £1,000,000 should also be excluded in the consolidated statement as is deemed transfer of asset. The consolidated revenues can now be prepared by adding the sales revenues of £96,000,000 with sales of subsidiary at £34,000,000 but should be reduced by £54,000 due to the sale of subsidiary to parent. The adjusted total revenues of £129,946,000 should come out. . Consolidated Cost of sales is derived by adding together the parent cost of goods sold at £62,000,000 for parent and £ 19,000,000 for subsidiary less £54,000 which representing a purchase account by subsidiary.

Such intercompany sale and purchase are considered transfer of assets to be eliminated (Liong Tong, 2013) and the resulting cost of goods as consolidated is £80, 9468,000. Consolidate gross profit in the amount of £49,000,000 comes out by deducted consolidated cost from consolidated revenues The consolidated income statement show appears as shown below. Task 3 a) Identity and state the formulas that are used to calculated ratios for: (1) liquidity-current ratio; acid test ratio; inventory turnover; trade receivable turnover; trade payable turnover; (2) Profitability -- gross margin ratio, net profit ratio; mark-up; and 93) Equity - return on investment (ROI); return on assets; earnings per share. b) Calculate the ratios.

Liquidity Ratios Current ratio meet its currently capacity to pay maturing obligations within the operating cycle by dividing current assets which consists of cash and cash equivalent, short-term investments and receivables, inventories, and other current assets by the current liabilities (Higgins, 2007). Quick is less strict than current ratio, hence the numerator is limited to cash and cash equivalents plus receivables before dividing the amount by current liabilities (Helfert, 2011).

When goods are turned into receivable per period this is called inventory turnover and computed by dividing cost of goods of sold to average inventory. When said receivable are collected or converted into cash per period of one year, the same is called receivable turnover (Khan & Jain. 2007; Arnold, 2004). Companies want to know how often suppliers are paid in terms of payable turnover and this is estimated by dividing cost of goods sold to average payables (Helfert, 2011).

Profitability ratios Gross margin the ratio of mark-up over the selling price per product. Net profit margin deducts further all the costs and expenses can be derived for every product sold from the gross profit. Dividing net profit to sales produces the net profit margin. Mark-up just is the profit per sale of produce but cost is limited the direct cost of the product (Kieso, et al, 2007). Equity Ratios Return on investment informs investors on the amount net income divided by average total equity.

Said average total equity should the begging and ending balances of the total equity then divide it by 2 (Kieso, et al, 2007). Return on assets related net income to average total assets. Average total assets is adds the beginning and ending balances of the total assets before dividing the total by 2 (Brigham, and Houston, 2002). The combined formulas for all of the three ratios together with the results after putting the actual given values are presented in Table B below: Table B – Summary of Formula with computed values.

Task 4 a) Research and evaluate the relevance and importance of key performance ratios, informing Lewis Raymond of assets management control effectiveness. Performance ratios to assess management effectiveness in the utilization of assets include inventory turnover, receivable turnover, and payable turnover and total asset turnover. The bigger or faster the resulting ratios from these measures except payable turnover, as against certain benchmarks, like industry average, the better it is for the company exhibiting such remarkable performance ratios.

Faster inventory turnover and faster receivable turnover against benchmarks coupled with slower payable turnover, would give the give the company advantage or leverage against competitors that would allow the company in maximizing value of shareholder. The practical effect would better liquidity and better profitability that are directly connected to better way of maximizing shareholder value. Managing assets at its best is attaining maximum productivity or getting the best out of given.

To illustrate, a company could produce 30 net income for every 100 assets would better than producing only £10 or lower for the same amount of assets as a form of investment. This is the reason why effective and capable managers should be rewarded and further developed in attaining the corporate goal of wealth maximization (Brigham and Houston, 2002). b) Identify and comment on three suggestions as to how the working capital of a business can be effectively managed. Working capital can be effectively managed by practicing good cash management, good receivable management, and good inventory management.

In cash management, a good manager must minimize the amount cash that should be held in conducting normal business activities, but he must have sufficient cash to take trade discounts, maintain credit rating and meet unexpected cash needs. In receivable management, its collection terms with customers must be shorter than payment terms with supplier to have allowance in preventing cash flow problems. In inventory management, the turnover must be faster to minimize storage and to make sure that goods are available when customers need them (Brigham and Houston, 2002).

Conclusion: This paper has shown how Tandem plc and subsidiary had its consolidated statement of financial position prepared, Paul Plc and its subsidiary had its consolidated income statement prepared, how to compute ratios for analysing the financial performance of Joseph Pye Limited and to understand the value assets management control effectiveness. References: Arnold, G. 2004. The Financial Times Guide To Investing: The Definitive Companion to Investment and the Financial Markets.

London: FT Prentice Hall Brigham, E. and Houston, J. 2002. Fundamentals of Financial Management, London: Thomson South-Western Gupta. 2004. Contemporary Auditing. U.P.: Tata McGraw-Hill Education Helfert, E. 2011. Techniques of Financial Analysis: A Mode. U.P.: McGraw-Hill Education (India) Pvt Limited Higgins. 2007. Analysis for Financial Management, Eighth Edition. New York: The McGraw−Hill Companies Khan & Jain. 2007. Financial Management. Uttar Pradesh: Tata McGraw-Hill Education Kieso, et al. 2007. Intermediate Accounting.

New Jersey: John Wiley and Sons Liong Tong, T. 2013. Consolidated Financial Statements, International Edition, Tax and Accounting Series. CCH Asia Pte Ltd. Neuhausen, B. and Schlank, R. 2007. CCH Accounting for Business Combinations, Goodwill, and Other Intangible Assets. CCH