How the Club Accounts for its Money - Term Paper Example

Financial Report Analysis Students Name: Institution’s Name: Introduction This report will try to analyze the various methods used by the Jazz club to prepare its financial statements. It will also select, evaluate and interpret the financial data together with the pertinent information so that it can do a formulation and assessment of the present and future financial status of Jazz Club. The report will use the accounting statements such as ratios to critically analyze the performance and also recommend on various stages within the club whether the methods used are viable or not and also point on the weaknesses that the Jazz club should emphasize on if they truly wish to continue as a going concern in business. Solutions will be provided on various accounts with proper advice on the way forward. The report will as well analyze how theclub accounts for its money whether on accrual or cash basis and recommend the best approach to this.Financial statements are very important to any organization since they help various interested groups make informed investment decision since they provide reliable information onan organizations ability to continue in business and also its credit worth. Analysis through Ratios Financial ratios are majorly used for modeling reasons both by researchers and practitioners. The company involves most interested parties like customers, suppliers, competitors, owners and management each having their own opinion in application of financial statement analysis in their studies. The managers of the club use the report on ratios in making informed decisions on areas of weaknesses within the club (Daley et al. 2012). Ratio analysis being one of the best placed methods of analyzing a company’s profitability is described as a form of financial statement analysis used to get a fast indication of an entities financial performance in various key areas of operationTamari (1978). The ratio have different classification, they include; Debt Management ratios, Profitability ratios, Market Value ratios, and short term solvency ratios. Computation of ratios allows for comparison of a firm which has different sizes. Ratios are also used to study trend in an organizations whether a firm has improved on certain areas which might have deteriorated sometimes back. Liquidity ratios are used to determine the ability of an organization to pay its short term debts. The key aspect is that the Jazz club should be able to pay its debts as they fall due the ratio used to give indication of this rate is the current ratio and quick ratio. Current gives the relationship between the current Assets and Current Liabilities The clubs Current Assets Stands at $28788 for the year 2012 and $99949 While Current Liabilities stands as $90741 and $210869 for the year 2012 and 2013 current assets CURRENT RATIO = current liabilities 2012 2013 28788/210869=0.1 99949/90741= 1 The above ratios indicate that in the year 2012 the club held a lot of credit transactions and took long to convert its raw materials into cash. This might be as a result of activity cycle (Beaver, 2008). Most customers and supplies took the advantage of credit period and never paid cash in time but come the year 2013 where the ratio is above one there was a lot of cash transaction meaning quick conversation with low credit transaction. Just as Franciar (2002) notes, since the current ratio takes a longer period in classifying Assets and Liabilities which might even for a whole year, it might not give a good indicator of short term problems of liquidity the quick ratio may be used instead since it has a very short time frame. An organizations’ liquidity greatly depends on its ability to manage its working capital. The ratio used in this scenario is the Debtors turn over. credit sales DEBTORS' TURNOVER = average accounts receivable Year 2012 2013 213,024(1469+0)/2 = 145days 244,224(5376+1469)/2 = 71.3 days The club is not doing well in terms of debtors turn over since it has given more days in collecting debts and this should been reduced since it affects its liquidity. More money is being held outside with the debtors that ought to have been used for other activities in the organization. The clubs policy on debt collection should be changed completely (Hamlin, 2012). Hooper and Potter (2006) argue that inventories are very key in managing assets in any organization, there levels must be adequate all the times in order to avoid any disruption in operation that might lead to business loss. When inventory is in excess it does tie up funds and reduces organizations profitability. The rate of the clubs turn over can be accessed through inventory turnover which is calculated as follows, Inventory Turnover= Cost of Goods Sold Average Inventory for the Period 2012 2013 119,052/(26776+6409)/2= 7.2 86,016/(7020+6409)/2 = 12.8 There is excess inventory turnover for the year 2013 and this affects the clubs profits this should be reduced by a greater margin to a void business loss since a lot of money is tied up in stock. More sales is adequate to help cub the situation and to a void holding too much stock. Profitability analysis When analyzing the profitability of an entity, a number of ratios can be considered. One ratio is the rate of return on total assets (ROA). The ROA is calculated without reference to the method of financing (ie debt or equity). To eliminate the effects of variations in the method of financing, we add back the after-tax expense related to interest. This enables comparisons between different organizations as if they were all 100% equity financed. Return on assets is calculated as, Return on Assets= Operating Profit after tax Interest Expense Average Total Sales 2012 2013 -81,657/(483987+708060)/2 = -0.13 134,457/(144212+483987)/2= 0.42 There is very low return on investment and the company therefore should increase itsprofit after task by reducing expenses hence increasing the total revenues. The approach being used currently is not viable and the policy needs to be changed (Hubbard, 2008). Earnings Per share Another important ratio that can also be used to assess the company’s profitability is the earning per share it helps in calculating the amount of profit on each equity share. The main significance of this ratio is evident the higher the earning per share the more profitable the organization is. And for the Jazz Club house the earning per share is very low both consecutive years indicating that even members are not able to receive bonus share. James and Burgoyne (2001) argue that financial ratios help in showing how a company performs financially and its condition by examining relationships of its financial statements with the current market values. A good financial analysis needs efficiency that will be able to put its liquidity position, Profitability and solvency to work. Other tools like that of common size analysis, Dupont Model can be used to help in understanding where the company has been before in terms of its financial position (Millmore, 2007). Timo (1994) believe that we can also use relationships within financial statement accounts in pro forma analysis, bringing to focus the company’s income statements and statements of financial position for future periods. The club uses the accrual concept to account for its revenues since it recognizes the revenues not when the actual cash is received but when the service is rendered to a client, this is generally accepted in accordance with the Australian Accounting Standards the only part needs to looked in is the period it does take to collect money from debtors since the turn over is very high. Clients take long before they pay for the services rendered for and this affects the liquidity position of the club. When revenues have already been recorded in the financial statement it shows receipts even though the cash has not been received and the longer the period it takes for receipt the danger it poses to the company statements. Below is an extract of the revenue receipt and recognition for the year 2012 and 2013 2013 2012 $ $ Revenue Retail sales 244,224 202,984 Cost of sales (119,052) (86,016) Gross Profit 125,172 116,968 Poker machines 12,312 6,761 Other revenue 30,186 8,400 Other income 8,026 8,584 Total revenue 175,696 140,713 Due to longer debtors collection period the club may try cash base accounting where they will only recognize revenues when actual payment is received so that the posting reflects actual receipts not accruals, this will help in solving the liquidity problems, a comparison can be made for the two assumptions then the best of the two is selected so long as the selection complies with the Accounting Standards. All the revenues are accounted for under accrual basis and they have been classified with headings that put together all costs related to the category. On instances where cost cannot be directly associated with a particular category they have been a signed to activities on consistency basis with use of resources. Most computerized systems used in accounting do generates reports either in cash or accrual basis in order to meet Goods and services Tax obligations in reporting. On cash flow statement Analysis The club is spending a lot of money on its expenditure especially the purchases, the analysis on the cash flow statements indicate a high rate of payment made to the supplies and employees. On the year under review Payments made to supplies and employees totaled to $ 397,257 and 281,217 for the year 2013 and 2012 respectively against receipt from members and customers stood that stood at $315,311 and $243,339 for the two years this gives a negative figure on the comparison of the two hence low income. This calls for removal of unnecessary expenditure since it’s not realistic to be spending more and cashing less. Below is an extract from the two years on the cash flow 2013 2012 $ $ Cash flows from operating activities Receipts from members and customers 315,311 243,339 Payments to suppliers and employees (397,257) (281,217) Interest paid (31,775) (21,092) Interest received 388 265 Net cash provided by operating activities (113,333) (58,705) Alternatively members can be encouraged to contribute more to the club so as to boost its revenue by a given margin another area of target is payments to the employees. When the business is not doing well financially club directors should consider either cutting down salaries of lying off some workers in order to reduce the wage bill. They can also put majority of employees on contract and commission based so as to pay as per the performance this will save the club a lot of money. The a mount of operating cash generated by the club shows its ability to fund loan repayments and its operating activities without resorting to external sources of finance which will keep the club to a lot of debts. The report from the club indicates that it will be forced to make external borrowing since its rate of operating cash is very low. Some of the dangers of having external borrowing to an organization includes a company being indebted to other institutions which will scare investors in the long run since no one can invest in a company which has lots of debt which can lead to closure as a result incase repaying back the loans becomes a challenge. On the profit and loss account the statements shows clearly that there was an increase in sales in the two consecutive years in the year 2013 sales stood at $244,224 while in the year 2012 sales stood at $ 202, 984 showing an increase of $ 41,240 signifying an increase in profit. This means that the strategy adopted in the year 2013 was working out well for the company and should not be changed. There was also an increase in both opening and closing stock giving good indication for better things for the club.The worrying part is on expenditure. In the year 2013 the expenditures increased with a very high margin 2013 2012 Expenditure Finance costs (31,775) (21,436) Clubhouse supplies (15,542) (11,507) Fundraising (9,988) (3,452) Membership (805) (546) Marketing (25,926) (15,355) Occupancy (40,636) (30,840) Employee benefits (134,662) (86,714) Administration (37,153) (34,555) Other (13,666) (17,965) Total Expenses (310,153) (222,370) Some expenses like administration needs to be reduced because it increased with almost four thousand areas of concern like marketing spent less and that’s the department that ought to have spent a lot of money. Employee benefits almost doubles and this is a very worrying trend, its not realistic for the club to pay out its employees a lot of benefits when its struggling financially. A good strategy must be adopted to help relieve the club from unnecessary expense things like occupancy had to be either abolished or reduced in terms of cost. Fundraising is a cost Centre opt to be abolished completely the club can’t fundraise for other things when its own finances are not stable that can make it compete with other market players in the industry. Bernstein (2002) the club is charging its depreciation on a straight line basis which lowers the value of assets than the value shown on the books. Assets like cars loose more in the beginning years than the subsequent. So if the straight line is used then the actual resale value will not be realized in the books. An also the clubs income being reported will be higher if the actual value of the depreciation is used. The best method to be used here is reducing balance which allows for calculation of depreciation on a yearly basis on the opening balance of an assetit will help in matching of the cost of the Assets and the business revenue. Since the club is struggling with some yearly burden on profit and loss account the reducing balance will equalize the burden in respect to both repairs and depreciation. As a result the accounting policy should be changed on how depreciation is being charged since this is the reason even why tax application cannot be applied since it will show serious loses. Tracy (2000) Budgeting helps in spending less for an organization and also planning for short and long term plans. It also helps in forecasting on the future plans. A good budget is one that is easy to understand and able to help the club cub on expenses hence proper decision it also help in a voiding wasteful of resources. In the month of January and February year 2013 the budgeting indicated bet loss an indication that there were wasteful in terms resources. More was spent than what was cashed in. From the budget, performance of the club has deteriorated over time and cutting down the expenses is the only way out Summary Stephens, (2000) Financial Statements are summaries of monetary data concerning an entity, financial report gives a detailed explanation of the financial position of an entity its expenditures and recommendations. All the statements have been prepared in accordance with the requirements of the Australian Accounting Standards Act 2001 giving full disclosure as per the requirements, some of the Acts applies during reporting includes AASB 1053, AASB2012-2. Some of the statements used during analysis include the financial ratios which are used to show the profitability of company overtime. The statement of financial position which gives the net worth of a company interms of assets and how much a company is owed by its debtors is necessary. The club has little Assets which doesn’t attract much interest as far as its net worth is concerned the managers should think of a plan on how this can be improved so that the club can be in a better position of getting external sources of finance from institutions like banks and micro financial institutions to help it stand strong financially. Investors will also be attracted with good infrastructure from the club that is geared towards its assets portfolio. The larger the asset base the more marketable the club. Another important component is the statement of cash flow which gives the liquidity position of the company.The a mount of operating cash generated by the club shows its ability to fund loan repayments and its operating activities without resorting to external sources of finance Tracy (2000) This report is not only useful to the directors but also to the investors and those with vast interest on the club that includes even thecustomers; the report will help them make informed decisions about the club for those willing tobecome members. An important assumption in the financial statement use is often assumed that the past will all time predict the future, the trend help in planning for organization and to know whether the companyis a going concern or not. Foster (1978) gives the outlier issue in the Financial Ratio Analysis, Later he gives another view in Foster (1986) that talked about various alternatives of dealing with outliers in Financial Reporting Analysis. They include erasing true outliers, continuing with the current outlier and doing some adjustments on the financial data and also equating outliers to low extreme values. There are also technical, economical and accounting reasons that have led to the rise of outliers in financial ratio analysis. In Ratio analysis research transformation and trimming may pose a challenge for the theoretical vigor while trying to improve on the statistical results rather than deleting the observations Franciar (2002) suggests on using good distribution with adequate fat tails in statistical reference making for the financial ratio analysis research. He tries to get the best fitting distribution over time during 1634 in UK and Irish Firms. The best fitting varies a cross financial ratios. Franciar (2002) also gives the weighted averages in financial ratios in accordance with some French firms. Hubbard (2008) also suggest that normality can be solved by other means rather than doing away with the outliers Reference Beaver, W. (2008)‘Alternative Accounting Measures As predictors of failure’ Accounting Review Bernstein A. (2002) ‘ Reading between the lines’ Forbes Daley, J., McGannon, C., & Ginnivan, L. (2012). Game-changers: Economic reform priorities for Australia. Melbourne: Grattan Institute from The Conversation, Future of Work: https://theconversation.edu.au/tool-or-time-thief-technology-and-the-work-life-balance-8165 Chang, Lucia S.(1981) ‘An international Comparison of investor Uses of financial Statements’ The international Journal of Accounting Education Research Franciar A (2002)‘Attitudes of Management Accountants on the state of the Art’ Management Accounting Hamlin. R. (2012) Towards a Universalistic Model of Leadership: a comparative study of Britishand American empirically derived criteria of managerial and leadership effectiveness. Working paper WP005/02, University of Wolverhampton. Hooper, A. and Potter, J. (2006) The Business of Leadership. Aldershot: Ashgate Publishing Company. Hubbard, G. (2008). Strategic management: Thinking, analysis, action. Australia: Pearson. James, K. and Burgoyne, J. (2001) Leadership Development: Best practice guide for organisations. London: Council for Excellence in Management and Leadership. Johnson, G., Scholes, K., & Wittington, R. (2011). Exploring Strategy: Text & Cases. (9th ed). London: Prentice Hall. Millmore, M. (2007). Strategic Human Resource Management: Contemporary Issues. Harlow: Financial Times, Prentice Hall. Timo Salmi (1994) ‘A Review of the Theoretical and Empirical Basis of Financial Ratio Analysis Read More