The Strategic Operations of Toyota - Coursework Example

Accounting Representation: Public and Private Sectors Contents Contents 2 Executive summary 3 Task Toyota Motor Corporation 4 Context and strategyanalysis 4 Overview and accounting analysis 5 Financial analysis 7 Evaluation 9 Task 2 10 Fund accounting system 10 Yorba Linda case study 11 Reference list 13 Executive summary Toyota is one of the largest manufacturers of automobiles, which plays a highly significant role in developing the economy of Japan. The assignment studies the industry background of Toyota; different strategies adopted by the firm that has helped to achieve success; financial strategies of the company and its overall performance analysis and interpretation. A strong financial structure is essential for organizational success and advancement. The strategic operations of Toyota have enabled the company to attain higher revenues. Also, financial policies of the company have helped it to manage funds better and allocate them wisely towards different profitable ventures. The second part of the research paper is associated with analyzing the case study of Yorba Linda in California. The part also lays considerable focus upon multiple aspects associated with fund accounting system. Task 1: Toyota Motor Corporation Context and strategy analysis Toyota is a Japanese automotive company with its headquarters in Aichi, Japan. It a multinational organization and has facilities located in nations of Asia, Europe, Africa and North America. On the basis of revenue, Toyota is the fourteenth largest company of the world (Liker and Meier, 2007). The major competitors of Toyota are General Motors and Ford Motor Company. For requirements of the research, Ford Motor Company has been selected for comparative performance analysis The automotive industry is one of the largest as well as fastest growing industries of the world. It is characterized by low number of new entrants due to high capital requirements for establishing business. Most organizations of this industry are multinational and have reached economies of scale because of which they have a large number of brands in the market. Additionally, rivalries amongst competitors are high as they sell almost similar type of products with less differentiation. The bargaining powers of suppliers are low in this industry in respect of big international firms. This is due to the aspect that companies, owing to their high brand image and huge market share, have the liberty to choose amongst a number of suppliers. Figure 1: Worldwide Sales Trend of Nokia (Source: Online Marketing trends, 2012) The strategic success factor of Toyota arises of its adherence towards innovation. The company invests hugely in analyzing present and future needs of the automobile industry. Accordingly, the company develops its products and marketing strategies. Toyota realizes the fact that every nation has its own automobile needs and preferences based upon their economic characteristics, social preferences and purchasing power of people. The company manufactures its products, keeping such aspects in mind (Salleh, Kasolang, and Jaafar, 2012). Overview and accounting analysis Key Financials The company follows regulations laid down by the IFRS in respect of organizational accounting. The company recognizes inflow of cash at time of realization and expenses are accounted on an anticipatory basis. Inventories are recorded on the basis of cost or market price, whichever is lower. Inventories are recorded mainly on the basis of FIFO method. For accounting purposes, the company follows the straight line method of depreciation (Monden, 2011). Accounting flexibility Accounting for transactions involves estimating the expenses and incomes that are likely to arise in future. This is done so that budgeted financials can be used for planning and decision making. This also helps an organization to conduct comparative analysis in order to identify deviations from actual financial performance. It is, therefore, necessary that financial statements are developed in a manner where there is adequate scope for change, incorporating new items and facilitating planning and decision making. From the income statement of Toyota, it can be seen that the company has been incurring declining levels of interest expenses. This shows that the company has low dependency upon borrowed capital. Hence, financial statements are prepared in such a manner that there is sufficient disclosure relating to the firms policies, facilitating financial decision making. The organizational structure of Toyota is not rigid. The company frequently undergoes changes so as to develop new products and integrate innovative technologies. Thus, it is essential for the company to maintain a flexible system of record keeping. Financial statements are maintained by the company, giving adequate scope for change. Accounting strategy The company ensures that there is adequate level of fairness and honesty existing in the accounting policies followed. The company adopts the accounting standards in such a manner that items disclosed in financial statements are calculated correctly and recorded at their fair value. It is important for the company to maintain correct and appropriate records so that decision making process is easier and simpler. The company is seen to use interest rate swaps derivatives for modifying exposure associated with fluctuating rates of interest. In this manner, different strategic steps have been taken by the company to reduce risk element in conducting business. The company had, however, suffered a downfall in its revenues in 2009. This was primarily due to the global financial crisis. The company during this period had acquired an emergency loan for sustaining its operations from Japan Bank for International Corporation. Even so, through efficient operational planning, the company was able to raise its revenues in subsequent years. The company also aims to augment revenues by developing innovative products for increasing market share and tapping new market areas. Overall, the company has been observed to remain in a stable financial position, which has helped to invest in different subsidiary activities and diversify operations (Magee, 2008). Quality of disclosure Accounting statements are required to be prepared in such a manner that it reveals financial condition of the firm. The statements of Toyota indicate that the company has been in a stable financial condition. The total assets of the company have significantly been increasing and a notable rise is evident in its level of shareholders value of equity. This signifies that the company has performed well over the last years (Faculty of Economics and Business Administration, 2010). Potential red flag The dependence of companies over borrowed capital was an evident cause for loss of revenues during economic critical times. Since then, the company has been following the policy of reducing its level of borrowed capital and depending more upon revenue based finances such as, equity holding. The firm has also invested in different derivates in order to hedge off risks. The company has also not been able to develop any new product in recent times, which has been a cause of concern for the company. Toyota is exposed to the risk of losing its market share to those companies who develop cheaper cars. Although presently, the company is quite strong financially, it is necessary for the firm to maintain market share so that growth is facilitated (Magee, 2008). Financial analysis The financial ratios of Toyota Motor Corporation and Ford Motors have been analyzed in this section. Net profit ratio Toyota has had a positive net profit ratio since the economic crisis. The profits of the company had greatly fallen during the period of 2009. Prior to this period, the company had a stable profit structure. After the economic crisis, Toyota has been able to boost its revenues and improve financial conditions. A positive net profit signifies that company is able to cover its costs of operations effectively. Ford’s net profits had fallen since the year 2011. The dominance of Toyota and General Motors over the market has been a primary cause behind fall of revenues of Ford in recent years (Toyota, 2012). Return on assets This ratio helps in measuring how effectively a firm can convert its assets into profits. It signifies that a firm is able to suitably utilize its assets for producing output, which in turn helps to generate sufficient revenue. The company has had positive returns on assets signifying that it yields adequate level of sales to meet internal expenses and growth strategies. On the other hand, Ford’s financial statements reveal a falling level of return on assets due to lack of sufficient revenue generation. This signifies that the company has been incapable of utilizing its assets for proper revenue generation (Toyota, 2012). Return on equity This ratio is considered to be most important by investors. It states whether a firm has been successful at earning sufficient profits in order to compensate for the risk of being in business. Toyota has been successful at earning high profits for maximizing shareholders’ wealth over last years. The company’s returns had fallen during 2009, considering the low net profits (Toyota, 2012). Due to insufficient revenues, Ford has remained incapable of generating high returns on its investments received. Such a situation is undesirable for investors, who perceive the organization to be failing. This may cause investors to withdraw finances from the firm, leading the company into a financial crisis. Current ratio Current ratio signifies a firm’s ability to meet short-term expenses so as to be able to successfully continue its operations without any hindrances. Toyota’s current ratio implies that the company has been incurring positive and high current ratio values. This ratio also indicates that there is sufficient amount of liquidity existing in the organization (Toyota, 2012). Ford’s financial statement in respect of current ratio has remained positive. This denotes that the level of current liabilities have been quite low, resulting in positive current ratio. Cost of goods sold to sales It is important for a firm to incur revenue that is higher than the total cost of operations of a firm. The cost goods sold to sales ratio signifies this aspect. The ratio is positive and high, if revenue earned by a firm is higher than the cost of operations. However, the ratio would be notably low if there is low margin difference between these two elements. The analysis of this ratio shows that the level of sales in Toyota has been high, which has in turn created positive cost of goods to sales ratio (Toyota, 2012). In case of Ford as well, a similar situation is seen to exist. Ford also has a high level of revenue due to adequate market share. It is for this reason that there is high level of competition existing between Toyota and Ford. Evaluation The above financial and accounting analysis of Toyota reveals that the company has been successful at generating sufficient revenue. The financial condition of the company has been more than satisfactory. A good financial structure indicates that strategies and operations adopted by the firm have been supportive towards organizational success. The three key elements relating to Toyota’s financial performance are growth, efficiency and stability. The company has been able to secure itself in a strong financial base by ensuring adequate liquidity and maximizing shareholders wealth. Such strong values and dedicated performance has helped the company to spread its activities across the globe and survive strong competition arising from other automobile giants. Toyota has been manufacturing a significant portion of automobiles at its overseas locations. The saturated state of Japanese markets and resources has induced the company to concentrate upon developing facilities internationally. Owing to such growth, Toyota at present plays a pivotal role in economic growth of nations such as, China, US, Japan, Korea, Brazil, India and Mexico (Toyota, 2014). Toyota has a good market reputation, which has immensely helped the company. The company is known in the market for superior quality products. One of the core aspects behind the organization’s success is adherence towards innovation. The company’s strategies incorporate immense dedication towards innovation related and research and development activities. Toyota was the first automobile company to introduce hybrid vehicles into the market. The company invests hugely upon research and development related work. The company analyses present and future requirements of consumers and accordingly develops their products. It is for such reasons that Toyota has gained recognition in the market as an innovative developer of automobiles. Being in the automobile industry, Toyota faces high competition from other firms such as, Ford, Volkswagen and General Motors. In order to be able to maintain market share, the company invests in innovation and develops better and improved products for consumers (Hino, 2006). The company innovates not only in terms of its products, but operations as well. The company was amongst the first to develop total quality management systems such as, Kaizen, Jidoka and Kanban, in their organizational activities. Such measures have helped the organization to lower costs of operation and minimize occurrence of mistakes. The company has set standards for other organizations in terms of quality control measures. Toyota was one of the first companies to implement lean systems of manufacturing in the factories. The company ensures that its activities have a significantly low effect upon the environment. Its manufacturing facilities comply with environmental regulations and maintain low wastage of materials and power. The company also develops automobiles that are environment friendly, safe and durable. The company understands the importance of environment friendly cars. Consumers, in this respect, are highly selective and check for the level of carbon emissions while purchasing automobiles. Toyota is considered as one of the best when it comes to understanding customers. The company strategically examines consumer needs for the present and future and manufactures automobiles accordingly. The business of Toyota is spread across the world and caters to different customers and business units. The masterminds at Toyota do not waste their time in conducting elaborating studies to analyze the environment of different nations and markets. Instead, they rely upon their common sense and understandings to interpret needs of consumers. Such a strategy helps in saving time as well as cost. Toyota and many other Japanese companies believe in the concept of Kaizen. Kaizen means continuous improvement. The Japanese adhere to the idea that nothing is so good that it cannot be improved further. The company aims at strategically improving its functions across different departments involving quality, management, competitiveness, staff development and technology (Clarke, 2006). Task 2 Fund accounting system Fund accounting is an accounting system, which is primarily used by non-profit organizations like, the city of Yorba Linda. This system facilitates organizations to portray the way in which funds were utilized, rather than presenting how they have earned the same. The accounting system takes the form of a collection of funds. Each fund system has a distinctive purpose, which ranges from accounting for operating expenses to funding for distinctive activities of the firm. Fund accounting is essentially a system by which transactions are categorized into groups based on the sources and uses of funds. Similar to contemporary systems of accounting, fund accounting also helps in understanding the financial condition of an organization. The primary objective of fund accounting is to analyze the flow of fund and evaluate organizational performance. The system of fund accounting also is supportive of budgetary analysis. Managers are able to review their expenditures and accordingly study deviations and take necessary steps for correcting the same. The system in general follows the CAFR accounting policies, which are used by local and state governments. Based on fund accounting system, non-profit organizations maintain their accounts on accrual basis. Fund accounting is not followed by many organizations as experts believe that the system has several shortcomings. The system fails to correctly interpret true and fair intrinsic value of the fund. It is also seen that the system does not fulfil accounting needs of the different interest groups. One of the features of fund accounting system is that it allows the business to allocate funds for specific purposes based upon its requirement. There are no specified limits regarding the allocation of funds to different groups. Non profit organizations are generally involved in a number of charitable and social development works of various types. It can be assured how much fund is allocated for a specific purpose, by dividing the total fund into different groups. It also helps in preventing the mixing up of funds. It facilitates maintain detailed accounts regarding specific types of funds. Therefore if there are any disputes in accounting, mangers can be held responsible. Despite various advantages, a large number of non profit organizations chose to follow the accrual system of accounting over fund accounting system. In fund accounting, finance is allocated to different projects before they have actually been in incurred. However in the accrual system of accounting expenses are recorded only when they are actually incurred to the firm. Hence the accrual system is considered fairer. Yorba Linda case study The city of Yorba Linda was expected to have a higher level of transparency in the fiscal year 1991-92. Through the three major changes introduced by Mr Simonian, the city can maintain their accounts in a more efficient manner. The budgetary system shall help citizens to understand the sources and uses of funds clearly. The implementation of the reward system can help the city to increase productivity of different council members. The new multiyear budgeting system would ensure that critical and important projects of the government, such as, developing infrastructural facilities, would have sufficient fund allocation so as to prevent work from being halted. The new accounting format that would follow the accrual system can help organization to review its accounts on a mid-year as well as annual basis. The new system can offer better transparency and facilitate proper delegation of responsibilities. It was also perceived that the system would bring in greater strictness in the ways in which funds are managed. The new system would help managers to make better projections regarding allocation of resources. Closer monitoring of the budget would allow management to maintain control over the level of inflow and outflow of funds from departmental level. The new system facilitates better delegation of responsibility as each manager is responsible for the functions in their respective departments. They are accountable towards the tasks and responsibilities undertaken by them. Accordingly they are also held responsible towards their departmental budgets and expenses. The new system would help managers to maintain low levels of expenses as there would be detailed and greater transparency. The system would also prevent wastage of resources by increasing efficiency and preventing and removing those aspects from the facility which are non-productive. It can therefore be concluded that through the new system a better accounting environment can be developed. Reference list Clarke, C., 2006. Automotive Production Systems and Standardization. New York: Springer Faculty of Economics and Business Administration, 2010. Toyota’s business strategies in international markets. [pdf] University of Brasov. Available at: [Accessed 16 May 2014]. Hino, S., 2006. Inside the mind of Toyota. New York: Productivity Press. Liker, J. K. and Meier, D., 2007. The Toyota Way Fieldbook. New Delhi: Tata McGraw-Hill. Magee, D., 2008. How Toyota became #1. New York: Penguin Group Inc. Monden, Y., 2011. Toyota Production System. Florida: CRC Press. Online Marketing trends, 2012. Social media at Toyota: Case study. [online] Available at: [Accessed 16 May 2014]. Salleh, N. A. M., Kasolang, S. and Jaafar, H. A., 2012. Review study of developing an integrated TQM with LM framework model in Malaysian automotive industry. The TQM Journal, 24(5), pp. 399-417. Toyota, 2012. Annual report 2012. [online] Available at: [Accessed 16 May 2014]. Toyota, 2014. Corporate Philosophy. 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