Accounting for Business of Jitterbug Company - Case Study Example

ACCOUNTING FOR BUSINESS OF JITTERBUG COMPANY Name: Date of Submission: Institution’s name: Executive Summary Jitterbug Company is considered a successful as its operations in the economy are magnificent. The Net profit outlay is considerably high and the company wishes to secure a loan in an attempt to increase its operations by way of expansion. The company’s profitability ratios; price earnings ratio, dividend yield ratio, returns on shareholders among others are considered magnificent. In the case of company’s liquidity, the company can meet its short term obligations without imperative inclination to other mode of financing other than with its assets. Finally, Jitterbug Company financial stability is determined in order to make an informed decision on whether to provide the company with the loan they need or not. Table of Contents Executive summary 2 Introduction 4 Profitability 5 Liquidity 6 Financial Stability 7 Conclusion 8 Recommendations...……………………………………………………………………………….8 References ...……………………………………………………………………………………11 Introduction Jitterbug Company is involved in hosting special events like master classes, concerts and other happenings that involve Jazz undertakings. It was purchased by Shane long in 2008 and involves the trading in the Jazz & Jive club. Currently, the company retails in posters, branded clothing, prints and books in addition to its primary operation. The upgrading of its operations has been perceived to have hyped the company’s profitability and enhance the overall company’s performance over the last few years. The report entails the company’s financial statements; the balance sheet, profit and loss statements and the statements of cash flows. The focus is on its performance in the economy and as such the liquidity, profitability and the financial stability for the company will be determined. The bank will decide on whether to grant Jitterbug loan to expand its operations or not basing on the financial analysis to be provided. Profitability The operating profit for the company increased over the past three years. For instance the reported operating profit after taxation was $104000, $220000 and $214000 for 2008, 2009 and 2010 respectively. This increase ensured that the profitability ratios in which the company experienced also increased tremendously. In the case of the return on assets (ROA) there was an increase 0.5% in 2010 as compared to that of 2009. This indicated an increase of 25.9% in regard to 2008 Return on Assets’ reported value. Following this trend, return on assets ratio will increase making the company to effectively realize the required profits from the assets in which it has (Bill, 2001). Returns on Shareholders Equity also experienced an upward shift in its ratio. The company reported an increased value of 44.3% in 2010 in comparison to 41.9% for the year 2009. The increase was facilitated by the increased company’s operations and the subsequent increase in the share price of the shareholder’s shares. In the case where the company is competitive in the economy its share prices sky rockets making it realize its economic benefit. The importance of increased return on shareholders equity is that the investors will be willing to invest in the shares of Jitterbug Company hence increasing its capital outlay for expansion and increasing operations. The trend is expected to continue at this rate and the company speculates a tremendous increase on the return on shareholders equity and the plan for expansion of its operations will be enhanced (Erich, 2001). The company’s price earning ratio was reported at 32.9%. This implies that the company’s current profit outlay is higher than the speculated amount in the industry. The price earning ratio for many companies was determined at 21% in the year 2010.following the current trend of increased profit outlay, the future price earning ratio will be high therefore profitability health of the company will be unquestionable. The Dividend Yield ratio for the company in 2010 was 39.08%. It provides a clear indicator to the investor on the imperative measures to be undertaken when making decision concerning the future investment and the available investment opportunities in the economy. The Dividend Payout ratio for the company was reported at 118.7% in 2010 and 120.0% in 2009; which was a drop by 1.3%. The company resulted to increasing its retained earnings rather than using the net income for dividend payments. The investor will use the information provided to make a decision on whether to invest in a company that uses its net income in payment of dividends rather than as retained earnings. Generally, Jitterbug profitability level in the economy is prominent and if the trend continues, in the near future, it will realize its strategic goals with ease. Liquidity Jitterbug Company Current ratio was at 2.05:1 in 2010 and its quick ratio was 1.25:1. The industrial current ratio and quick ratio is determined at 2:1 and 1:1 respectively. There was an improvement from the previous year’s liquidity ratios. The company enjoys a sound liquid status where it can easily meet its short term obligations with the available liquid assets. The current assets’ proportion of the total assets for 2010 was reported at 34.5% which was a decrease by 4.0%. On the other hand, the current liabilities percentage in regard to that for the overall liabilities saw an increase of 4.2% from 12.6% in the prior years. As the current assets decreases, it means that they were used to meet the current liabilities for that period hence denoting the company’s liquid nature (Bill, 2001). As the current assets less stock are equal to the current liabilities, the company is perceived to be more liquid as only the assets that can be converted to cash easily are in the same proportion to the current liabilities. Therefore, where need be, they can be converted with ease. The Account receivables increased by 0.7% from the previous year’s transactions while the debtors turnover arte remained the same. Under normal circumstances, the high debtor ratio denotes the company is performing well and vice versa. The debts turnover rate of 7.3days implies that Jitterbug Company was able to collect its debts effectively as the collection period is given at 50 days. The inventory turnover was 100 days which was higher than the industrial level of 37 days. This shows that the company is operating efficiently. The company’s is enjoying the liquidity level that enhances it to meet its obligations without resorting to other means of credit acquisition to pay its obligations. Financial Stability The company’s financial stability articulates to the trend of its Debt ratio, Equity ratio, Asset turnover and Capitalization ratios. For Jitterbug Company, the debt ratio was reported at 29.1% which was an increase by 4.5% from the previous years’ ratio. This denoted that the 29.1% of the company’s activities are debt-financed. The increase in the debt ratio exposes the company’ to financial risk which in the long run will affect the overall financial flexibility for the company. The Equity ratio of 70.9% which was a decrease by 4.5% from the previous periods’ ratio denotes that the 70.9% of the company’s operations are equity-financed. Shareholders prefer a low equity ratio as long as the return on assets’ rate is higher than interest rate that is paid to the creditors (Erich, 2001). Following this trend, Jitterbug will eventually reduce the over-dependence on the equity-financing and rely on both the debt and equity financing of its operations. In the case of Asset turnover, Jitterbug Company reported a financial ratio of 3.44:1 which was lower than the industrial ratio of 4.20:1. This was achieved after the company realized a high profit margin due to increase in its sales as compared to the average profit margin in the industry. Capitalization ratio of 1.41:1 increased compared to the previous periods’ ratio due to decrease in the overall liabilities for the company. Generally capitalization ratio was facilitated by the increase in shareholders equity. The times interest earned ratio, being the other determining factor for the company’s financial stability, decreased as compared to the other previous period’s value. The ratio of 16.3 times implies that the company experienced a reduction in its earnings which was available in an attempt to meet the payments made on interest. The lower times interest earned ratio exposes Jitterbug Company to interest rate increases in the future (David, 2002). Generally, Jitterbug is financially stable and it can increase its operations or expand its activities with regard to the changes imminent in the economy. Conclusion The company’s increase in operations has seen its financial performance boosted and become competitive in the economy without any financial strain. The liquidity of the company is guaranteed therefore it can meet its short term obligations when they fall due with ease. In the context of making it competitive in the economy, Jitterbug Company is experiencing an increased profitability with major focus on its reported profit after tax. The company can pay its shareholders by use of the earnings available in an attempt to safeguard its business operations. Financial stability for the company is also cemented with the availability of both the debt-financing and equity-financing methods of financing its operations. In the future, following this trend, the company will be able to safeguard its competitive nature in the economy and the overall strategic goals will be achieved. Recommendations Jitterbug Company is experiencing a boom in its business operations as the undertakings that are configured aims at increasing the profit outlay and realize the company’s strategic goals. The efficiency of the company in realization of its objective will be achieved when the company indulges in expansion of its operations. The company should foster expansion and development of new markets for its products and services in order to maintain its competitiveness. Equity financing should be used in financing its operations with minimal concern or articulation to debt financing. It is, therefore, relevant for Jitterbug to be given the loan in order to finance its operations as they are able to repay the amount with interest thereon in due course. Shortcoming of basing decision solely on financial statements Financial statements are considered good when assessing the company’s performance either in when the investor is in need for investment strategy and where to invest. When analyzing the ratio analysis of the company, most of the data used in coming up with the ratios given are usually based on accrual basis of accounting data rather than being market based. Economists may perceive this strategy to be of importance but on a mere investor it is quite disadvantageous. On the economist’s side, it is perfect suitable to use accrual basis in an attempt to configure the differences between the market value and book value. Moreover, it enhances determination of bargaining power in the market. However, the discrepancies imminent in the information provided in the financial statements makes it hard for the investor, or any user of the financial statements, to understand the real asset value which would translate to the unreliable ratios (Thomas, 2003). Biasness and hiding of the vital financial statement reports or figures may characterize the entire financial statement information and in the long run may impede accurate decision making by the user of those statements. For instance, an investor or analyst will have to analyze the cash flow statements provided in an attempt to figure out whether the cash flow provided emanates form additional financing or operations activities. Other conventions that may affect the overall decision making include accounting for depreciation and the inventory accounting as some valuation methods increases the net profit outlay for the company. For effective analysis, the user of the financial statement should be able to the accounting policies in which the company used in arriving at the company’s financial position. As such, the comparison between the various companies would be effectively done and proper decision on the investment strategy arrived at. For instance, IAS 16 provides that asset valuation should be based on historical cost and as such increasing the organization’s profit outlay as depreciation is not factored in the calculation (Gill, 2005). Contrary to this, the company should consider factoring in the inflation adjustments in order to have a clear comparison between the company’s future performance and the current finical performance. For instance, the company may be perceived to have performed well but the figures provided may be aided by the inflation that occasionally hits the economy. As such the changes in the economic sector may show that the company to be performing well compared to other periods but in reality its operations may have declined. References BILL, R. 2001. Financial analysis. London: Prentice Hall. DAVID, V. 2002. Financial analysis and decision making: tools and techniques to solve financial problems and make effective business decisions. New York: McGraw-Hill Professional. ERICH, H. 2001. Financial analysis: tools and techniques : a guide for managers. New York: McGraw-Hill Professional. GILL, J. 2005. Financial analysis: the next step. London: Pearson Education. THOMAS, F. 2003. Essentials of financial analysis. London: John Wiley and Sons. Read More