X Limited - Classified Statement of Financial Performance and Statement of Financial Position - Example

Running header: Principles of Accounting Student’s name: Instructor’s name Subject code: Date of submission: X Limited Classified Statement of Financial Performance For The Year Ended 31st December 2013 2012 $ $ Sales revenue 400,000 357,000 Cost of goods sold (150,000) (146,000) Gross income 250,000 211,000 Operating expenses: General and administrative expenses (90,000) (96,000) Selling expenses (35,000) (47,000) Operating income 125,000 68,000 Interest expense (30,000) (25,000) Profit before tax 95,000 43,000 Tax expense (20,000) (14,000) Profit after tax 75,000 29,000 Dividend (12,000) 17,000) Retained earnings 63,000 12,000 X limited Statement of Financial Position As At 31st December 2013 2012 $ $ Assets Current assets Cash and cash equivalents 20,000 16,000 Accounts receivables 15,000 11,000 Inventories 70,000 62,000 Prepaid Insurance 5,000 7,000 Total Current Assets 110,000 96,000 Non-current assets Land 40,000 35,000 Buildings 325,000 293,000 Equipment 190,000 200,000 Trade marks 15,000 13,000 Total noncurrent assets 570,000 541,000 Total assets 680,000 637,000 Current liabilities Income tax payable 5,000 6,000 Interest payable 10,000 14,000 Loans 15,000 10,000 Wages payable 14,500 18,000 Total current liabilities 44,500 48,000 Noncurrent Liabilities Loans 290,000 278,000 Total noncurrent liabilities 290,000 278,000 Total liabilities 334,500 326,000 Owner’s Equity Contributed capital 300,000 300,000 Retained earnings 45,500 11,000 Total owner’s equity 345,500 311,000 Total liabilities and owner’s equity 680,000 637,000 Workings 1. Buildings 2013 2012 Book value $450,000 $412,000 Less accumulated depreciation ($125,000) ($119,000) $325,000 $293,000 2. Equipment Book value $250,000 $245,000 Less accumulated depreciation $ 60,000 $ 45,000 $190,000 $200,000 Financial ratios Ratio Formula 2013 2012 Return on assets Net income/total assets =125,000/680,000= 18.38% =68,000/637,000= 10.67% Return on equity Net income/shareholder’s equity =125,000/300,000 = 41.67% =68,000/300,000= 22.67% Net margin Net profit/revenue = 125,000/400,000 = 31.25% =68,000/357,000= 19.05% Quick ratio (Current assets- inventories)/Current liabilities =(110,000-70,000)/44,500 = 0.9 = (96,000 -62,000)/ 48,000 = 0.708 Current ratio Current assets/current liabilities = 110,000/ 44, 500 = 2.47 =96,000/48,000= 2 Asset turnover ratio Revenue/Total assets =400,000/680,000 = 58.82% =357,000/637,000 = 56.04% Averages settlement period for debtors (Days×AR) /Credit sales =(365*15,000)/400,000= 13.65 days =(366*11,000)/357,000= 11.28 days Average settlement period for creditors Ending accounts payable/ (cost of sales/Number of days) = (14,500*365)/150,000 = 35.28 days = (18,000* 366)/146,000 = 45.12 days Recommendations to management based on the above ratios The above financial ratios generally show an improving financial performance for the X Company limited during the year 2013 as compared to the company’s performance in 2012. The company’s improving financial performance as has been calculated in the ratios above can be analyzed using a number of factors as explained below; a) Liquidity –these are the ratios that measure X company Limited’s ability to meet its short term debt obligations or its ability to pay off its short term liabilities whenever they fall due. This means that the higher the company’s liquidity ratios the more is its ability to meet its short term financial obligations whenever they fall due. In this regard, X company’s liquidity ratios included the quick ratio and the current ratio. In 2012, the company had a current ratio of 2. However, this ratio improved to 2.7 in 2013. Similarly, the company’s quick ratio improved from 0.708 in 2012 to 0.9 in 2013. The implication of these ratios is that the company’s ability to meet short term obligations has improved during the two years period. However, the company seems to have kept most of its current assets in terms of merchandise inventory which means that if the stock is slow moving and all short-term liabilities fell due, the company would find it hard to meet the obligation fully. As such, there is need for the company to ensure that inventories don’t form the most of its assets or at least raise its quick ratio to 1 in the coming years in a bid to reduce the risk associated with being unable to meet short time financial obligations whenever they fall due. b) Profitability –these are the ratios that show whether the company was profitable and what kind of returns the owners got from their investments. These ratios include profit margin, return on assets and return on equity. Based on the ratio analysis above, the company had its profitability greatly improve in 2013 as compared to 2012. The company’s profit margin improved from 19.05% in 2012 to 31.25% in 2013. On the other hand, the company’s return on equity was 22.67 % in 2012 which improved to 41.67% in 2013. The company’s return on assets also improved from 1067% in 2012 to 18.38% in 2013. This is an indication that the company performed better in terms of profitability in 2013 compared to 2013. However, the company can still do better by increasing its marketing efforts so as to increase revenue and hence profitability. c) Debtors and creditors management –the company’s ability to manage its debtors through collection of receivables greatly declined from 11.28 days in 2012 to an average of 13.65 days in 2013. This is not good for the company and hence the company should consider tightening its credit policy while taking care not to affect its sales negatively. This could for instance be done by introducing cash discounts for those who pay promptly. On the other hand, the company performed better in paying off its accounts payables since this improved from 45.12 days in 2012 to 35.28 days in 2013. This is a good sign as it enables the company to operate without the risk of its short term operations being threatened by inability to pay on time. However, the company needs to come up with optimal short term debt repayment period in a bid to balance between paying short term debts on time and having enough cash for operations. Conclusion As can be observed above, the company’s financial performance showed a great improvement in 2013 as compared to 2013. However, the company needs to look at ways of improving how it collects accounts payables since this is the only aspect of financial performance that declined in 2013 in comparison to 2012 performance. In addition, there appears to be a room for the company to improve its performance even further if it can improve its marketing efforts in a bid to improve its revenues and hence profitability (James, 2013). By implementing these recommendations, it is hoped that the company will perform even better in the future. References: James, R2013, Fundamental principles of accounting, London, Rutledge. Read More