Accounting for Decision Making and Control - Example

Management accounting Customer Inserts His/her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name Date Executive summary This business report gives an evaluation and interpretation of the analysis and prospective liquidity, profitability and financial stability of Country Road limited and The Rejected Shop Limited. Country Road limited differentiates itself on its quality, design and brand. Country Road limited markets its clothing as reflecting an 'Australian way of life' and being made from the finest materials, sourced from around the world. Country Road limited has developed strong brand awareness. Country Road limited intends to expand the Country Road brand in South Africa through a combination of outlets within Woolworth’s stores, as well as stand alone stores. Major Customers & Competitors Country Road limited retail customers are predominantly fashion-conscious professionals. Country Road limited operates stand alone stores and has replaced wholesale sales with retail sales in its concession outlets within Myer and David Jones. Country Road limited competes with a diverse range of up market apparel designers and retailers, as well as other high-end brands within Myer and David Jones. Country Road limited supplies to Woolworth’s stores through a wholesale supply arrangement. The Reject Shop Limited (TRS) on the other hand is a discount range vendor of broad commodities products. The markdown variety merchant has around 192 stores in its total network focusing on low down price points, expedient store locations and offering a broad assortment of commodities. Stores are stretch across the whole of Australia. The shop sold ‘seconds’ and discontinued lines, hence The Reject Shop name. Today, the company has discontinued this and has adopted a new blueprint for stumpy prices and bargains on the everyday things people use most in their lives. Differentiating Factor TRS offers a broad variety of wide-ranging end user commodities to a wide section of civilization who wants or need to set aside money. Its products are focused on everyday needs such as domestic cleaning products, cosmetics, basic fixtures and kitchenware. Major Customers & Competitors Customers include the general public to various suppliers of goods to the Reject Shop. Its competitors would be other discount-type shops such as goods sold in Asian markets. This report uses methods such as trend, vertical and horizontal analysis as well as ratios such as Quick ratio, Debt ratio and Current ratios. Other interpretation in the report includes rates of return on Shareholders Equity and Total Assets and earnings per share to name a few. Table of content Introduction……………………………………………………………………….5 Body of the analysis……………………………………………………………….6 Profitability………………………………………………………………..6 Efficiency…………………………………………………………………7 Financial stability………………………………………………………….8 Additional information……………………………………………………………9 Limitation…………………………………………………………………………9 Recommendations………………………………………………………………..10 List of references…………………………………………………………………12 Appendix ………………………………………………………………………..13 Introduction Small scale enterprises are doing very well in our country. The sector is dominated by many competitors. The sector is a free market and lot of new investor entered into this market. This report gives analysis of two companies in the industry. The two companies are country Road limited and The Rejected Shop Limited. Base on the analyzed financial statement given we present a comparative report for the year 2009 and 2010. The origin of the analyzed data comes from the course instructor which authorized us as group to prepare the report. The instructor gave this report so that we learn business formal reporting as it is stipulated in the syllabus. The scope of this report is two companies in the industry which are Country Road limited and The Rejected Shop Limited. Like any other report there is limitation that we encountered in preparing this report. This report is based on data which is prepared by third party and we are not certain whether the analyzed data is authentic (Hinds, 2005). The report therefore is based on assumption that the data given is complete and free from errors. It also important to disclose the fact that the data analyzed is not accompanied with the complete book of accounts that are necessary to be reflected in the report. Another limitation is the shortage of knowledge that was reduces to make this report a better one. The sources of the data for this report were given by the instructor. We ourselves did not collect the annual financial report for the two companies. The method used to analyze the data did not fall within the part of the report since the data use in the report was already done (International Association of Fire Chiefs, National Fire Protection Association, 2009). Body of the analysis Profitability Profitability ratios show Country Road limited and The Rejected Shop Limited overall efficiency and performance. Ratios analysis show Country Road limited and The Rejected Shop Limited are able to translate sales dollars into profits at various stages of measurement. The Ratios show the return of Country Road limited and The Rejected Shop Limited represent the firm's ability to measure the overall efficiency of the firm in generating returns for its shareholders. Country Road Limited is performing better than the Rejected Shop Limited. Gross profit margin results of the year 2009 and 2010 for the two companies which are as follows; Country Road Limited 58.16% and 58.96% and Rejected Shop Limited 46.14% and 46.96% for the year 2009 and year 2010 respectively. Country Road Limited earns more profit on sale than Rejected Shop Limited. Country Road Limited is better able to control the cost of inventory and manufacturing cost than Rejected Shop Limited. The result indicates that Country Road Limited is efficient in passing its cost to customers than Rejected Shop Limited. The results also indicate growth trend in the year 2009 and year 2010. There is no much growth on the two companies in term of gross profit margin in the year 2010 relatively to year 2009. Country Road Limited gross profit margin decreases by 0.8% whereas Rejected Shop Limited increases by a mare 0.82% (Horngren, Datar, Foster, 2003). Rejected Shop Limited shows a better net profit proportionate to its sale than Country Road Limited. This is a clear indication that Rejected Shop Limited is efficient in managing its operating expenses than Country Road Limited. The net profit margin result for the Rejected Shop Limited in the year 2010 (6.96%) is better compared to 2009 (6.91%). On the other hand the results for the Country Road Limited in the 2010 (4.85%) is a decline from the 2009 (6.42%). This is also a clear indication that Rejected Shop Limited is improving in its management of the operating expenses and Country Road Limited is worsening. The low net profit margin ratio for the Country Road Limited mean that the company is generating enough sales as indicated by gross profit margin but the company is not keeping operating expenses under control to leave an acceptable net profit compared to Rejected Shop Limited. These results mean that Rejected Shop Limited Company is capitalizing on some competitive advantage that provide business with extra capacity and flexibility during the hard times compared to Country Road Limited. (Horngren, Datar, Foster, 2003). The decreasing in the net profit margin ratio over time for Country Road Limited indicate cost blowouts that require efficiency improvements in order to avoid need to take on debt to pay its expenses. Efficiency Return on equity is the proportion of profit a company earned to the total amount of equity found on the balance sheet. The analyzed results reveal that Country Road Limited and Rejected Shop Limited are generating a decreasing proportionate return on equity. Rejected Shop Limited shows a better return on equity than Country Road Limited. This indicates that Country Road Limited is not utilizing shareholders equity well on the competitive environment. On the other hand Rejected Shop is using every shareholder dollar to generate a better return to the shareholders. Rejected Shop uses shareholder equity efficiently to gain a better competitive edge than Country Road Limited (Garrison, 2009). Rejected Shop limited has a better asset turn over though it is decreasing. On the other hand Country Road Limited seems to be trailing behind in replacing the asset. There is a slight improvement in the year 2010 (2.88%) compared to 2009 (2.42%). Similar results are shown by inventory turnover. Inventory turn over is computed for any type of supply and inventory materials used in service delivery or manufacturing, work in progress (WIP), inventory combine, or finished products. Country Road Limited has a better performance in term of inventory turnover in 2009 (97) with a slight decline in 2010 (87). Rejected Shop limited is trailing behind with a turnover of 65 in the year 2009 and improved to 74 in the year 2010. The inventory turnover in the both companies is high and this indicates a positive feedback on the market availability. Country Road Limited is more efficient is selling out their stock compared to Rejected Shop limited and this can be attributed to ownership of the larger market share. Reject Shop is more efficient in term of debt management than Limited Country Road limited which reflects no debt turnover. Financial stability The current ratio for the year 2010 is 1.33 which is an increase from 1.11 in the year 2009. The increase in the ratio indicates an improvement in the performance in that the working capitals that are owed to creditors reduced in 2010 compared to 2009. The long term aspect of the company also indicates positive results (Garrison, 2009). The long term liability for the year 2010 was 52.37% which less compared to 88.94% for the year 2009. Country Road Limited Company is undergoing growth both in performance and asset acquisition (Garrison, 2009). The shareholders equity in the year 2010 improved compared with 2009. These are good result that shows shareholders equity has increase (Garrison, 2009). The ultimate objective of a shareholders is attain a better result in the year 2010 compared to 2009. The owners of Country Road limited and The Rejected Shop Limited maximize outsider's funds in by taking lesser risk of their investment and to increase their earnings (per share) by paying a lower fixed rate of interest to outsiders. This meets the objective of creditors who want the managers to invest and risk their share of proportionate investments. The ratio of 1:1 as reflected in analysis of Country Road limited and The Rejected Shop Limited is satisfactory ratio although there cannot be rule of thumb or standard norm for all types of businesses. Theoretically if the owner’s interests are greater than that of creditors, the financial position is highly solvent. In analysis of the long-term financial position it enjoys the same importance as the current ratio in the analysis of the short-term financial position (Weygandt ,Kimmel, & Kieso, 2009). Limitation Although financial statement analysis is highly useful tool, it has two limitations. These two limitations involve the comparability of financial data between companies and the need to look beyond ratios (Ruppel, 2011). Comparison of one company with another can provide valuable clues about the financial health of an organization (Ruppel, 2011). Unfortunately, differences in accounting methods between companies sometimes make it difficult to compare the companies' financial data (Ruppel, 2011). The analyst should keep in mind the lack of comparability of the data before drawing any definite conclusion. Nevertheless, even with this limitation in mind, comparisons of key ratios with other companies and with industry average often suggest avenues for further investigation (Ruppel, 2011). Recommendation From the above analysis it is clear that both companies have a potentiality to grow. There is much room in the market that has not been fully exploited (Ruppel, 2011). Country Road limited has a good competitive advantage in the market but they need to improve on the cost control (Ruppel, 2011). Reject shop limited enjoy effective control of the cost of production but they have not invest enough in the market share (Ruppel, 2011). An inexperienced analyst may assume that ratios are sufficient in themselves as a basis for judgment about the future (Ruppel, 2011). Nothing could be further from the truth. Conclusions based on ratios analysis must be regarded as tentative (Ruppel, 2011). Ratios should not be viewed as an end, but rather they should be viewed as starting point, as indicators of what to pursue in greater depth. They raise many questions, but they rarely answer any question by themselves (Ruppel, 2011). In addition to ratios, other sources of data should be analyzed in order to make judgment about the future of an organization (Ruppel, 2011). The analyst should look, for example, at industry trends, technological changes, changes in consumer tastes, changes in broad economic factors, and changes within the firm itself (Ruppel, 2011). A recent change in a key management position, for example, might provide a basis for optimization about the future, even though the past performance of the firm (as shown by its ratios) may have been mediocre (Ruppel, 2011). References: Australia Bureau of Statistic (2008), Year Book Australia, Bureau of Statistics. Chapman S, Hopwood G, Shields M (2009), Handbook of management accounting research, Elsevier. Chapman, S., Hopwood, G (2007), Handbook of management accounting research, Elsevier. Drury C, (2006), Cost and management accounting: an introduction, Cengage Learning EMEA. Garrison (2009), Managerial Accounting, Tata McGraw-Hill Education. Hinds, J (2005), The Ferguson guide to resumes and job hunting skills: a step-by-step guide to preparing for your job search, InfoBase. Horngren T, Datar M, Foster G (2003), Cost accounting: a managerial emphasis, Prentice Hall. International Association of Fire Chiefs, National Fire Protection Association (2009), Fire Officer: Principles and Practice, Jones & Bartlett Learning. Needles E, Powers M, Crosson V (2007), Principles of Accounting, Cengage Learning. Ruppel W (2011), Wiley GAAP for Governments: Interpretation and Application of Generally Accepted Accounting Principles for State and Local Governments, John Wiley and Sons. Stegarescu, D (2006), Decentralized government in an integrating world: quantitative studies for OECD countries, Springer Science & Business. Weygandt J ,Kimmel, D & Kieso E (2009), Managerial Accounting: Tools for Business Decision Making, John Wiley and Sons. Wise D (1990), Accounting in Australia, Houghton Mifflin. Zimmerman J (2008), Accounting for Decision Making and Control, McGraw-Hill Irwin. Read More