Ratio Calculations of Arriva Plc - Essay Example

Q a) Ratio Calculations of Arriva Plc. a) Interpretations of the ratios Current ratios of Arriva Plc. for 2006 as well as for 2005 are below thestandard of 2.0 that is occasionally cited as acceptable in any industry. But a ratio below 1.0 in any industry is below norms and it is certain that under such circumstances the company is facing difficulties in meeting its short term obligations. This view is again supported by the low acid test ratio in both the years. Acid test is part of current ratio but excludes inventory in its calculation. Acid test ratio is also very low to confirm that liquidity wise Arriva Plc. is facing a crisis. Return on capital employed or Return on Total assets measures the firm’s overall effectiveness in generating the profits. This ratio has gone up a little from 0.6 in 2005 to 0.7 in 2006. This increase does not signify much. The assets of the company are underutilized. Similarly return on net assets (also known as return on equity- ROE) measures the return earned on owners’ investments. Arriva Plc. earned 0.22 on equity or net assets in 2005 and 0.21 of net assets in 2006. The earnings are certainly not encouraging. Debtors’ collection period and Creditors’ payment period reflects average age of accounts receivable and accounts payable respectively. These collection and payment periods have shown a little improvement. Average collection period has come down from 47.98 days in 2005 to 46.04 in2006. Also average payment period has also come down from 95.78 days in 2005 to 82.67 days in 2005. This reflects the working capital problems or cash shortage being faced by Arriva Plc. Creditors have started doubting the company because of its dwindling liquidity position. That is why creditors have reduced the credit period. Administration costs of the company have slightly increased from 0.13 in 2005 to 0.14 in 2006. It appears that nothing extraordinary has happened on these costs for Arriva Plc to consider. Gross profit ratio cannot be calculated as there are no trading activities involved. But the net profit ratio shows an improvement from 5.9% in 2005 to 6.06% in 2006. This is certainly an achievement despite cash crunch and difficulties in meeting short term obligations faced by Arriva Plc. during the year 2006. Finally it has been observed that Arriva Plc. is a low geared company. With complete reliance on equities Arriva Plc. is finding it difficult to mobilize funds. It is suggestible for Arriva to reconsider about capital mix. It may be beneficial to bring in more debts not only to improve working capital position but to utilize assets to their full capacity. Q. 2 a) Importance of cost and volume in financial management of tourism industry One of the fastest growing industries in world is travel and tourism. Its financial managements assume importance as under noted issues impact the volumes and costs involved in its financial management: i) Travel and tourism involve activities ranging from accommodation, food and beverages service, transport, travel agency services, and also hospitality through cultural and other variety of services and actions. Every section of travel and tourism is basically an industry in itself, and looking from the magnitude of each section it is not possible for one company or an organization to venture independently into all sections of travels and tourism. Even after involving huge financial funding efficient results cannot be guaranteed. ii) Managing these sections of tourism involve resolutions of different issues by taking into account volume and impact of one activity over others. For example unless the transportation is efficient, hospitality at hotels cannot be effective and impressive. iii) Political, economical, and geographical changes coupled with ever developing tastes of customers make the industry more complex from the point of view of its financial management, as no body can draw an exact development pattern of the industry. iv) To explore developing strategic partnerships, designing public private interfaces, and creations of management practices. b) Pricing methods of financial management used in travel and tourism industry i) Pricing in tourism industry depends upon season, operational costs, competition and demand generated by existing and potential tourists. ii) Like in any other business, the operators fix prices based on the method of covering operational costs (called overheads) by adding thereto a suitable margin. iii) Like in any other businesses there are wholesalers (tour operators) and retailers Travel agents) Tour operators provide travel packages to tour operators, who in turn provide customers an accessible place to book travel products. Tour operators may be international or domestic. International tour operators provide commission to domestic tour operators, who in turn share commission and other incentives with travel agents. iv) Travel package pricing is an exercise to achieve a sort of equilibrium in the cost and services to customers. c)i) Reasons for making profits in travel and tourism Growth in other industries like medical industry in developing countries is one of the reasons for making profits. This reason sound a little out of context, but the reality is tourism is boosting unexpected sectors for the sake of adding purpose beside leisure to tourism. Tourism contributes to economic conservations like foreign exchange earnings, contribution to government revenues, and generation of employment and business opportunities. One can argue as to what is the purpose of development of so called ‘space tourism’ John Spencer, author along with Karen Rugg, of ‘Space Tourism’ states the reason as “to have that very personal off- world experience.”1 Tourism provides a real taste of exceptional experiences human always yearning for. ii) Factors influencing profits for organizations in travel and tourism An investment requiring huge fixed cost in tourism industry is one of the man reasons to earn profits. Economic significances of travel and tourism, like growth in employment, effects on capital market etc. are also the main factors to earn profits. Regional developments and event development (like Olympics) are other forcing factors for tourism industry to be prosperous. Q3 a) Different types of management accounting information that could be used in travel and tourism organizations: i) Cost analysis and cost classifications. ii) Data created from absorption and activity based costing iii) Decision making through marginal costing and CVP analysis. iv) Budgetary planning and budgetary processing v) Profit sensivity analysis, vi) Capital investment appraisal and many others. b) The purposes and uses of management accounting in travel and tourism as decision making tools. To develop and implement cost effective controls for result oriented management Assess the adequacy of programs and orientations, Identify noted improvements and take corrective actions, and Report management enabling it act instantly as tourism is short lived in any individual venture Q 4 Analysis of the sources and distribution of funding for London 2012 Olympics. The London Organizing Committee of the Olympic Games and the Paralympics Games (LOCOG) is a private company. The budget of the 2012 Olympic is £ 2 billion. The committee will raise the entire budgetary funds from private sector. The Olympic Delivery Authority (ODA) is a public sector body responsible for venues and infrastructure for 2012 Olympics. The ODA is funded by Department for culture, media and sport, the Greater London Authority, the London Development Agency, and the Olympic Lottery Distributor. (Funding)2 The Chancellor of Exchequer, on behalf of Government, has underwritten the costs of the games as per the requirements of International Olympic Committee. As per the House of Commons Culture, Media, and Sport Committee, it was informed that estimated cost of staging the games are expected to be covered within the target of £ 2 billion. The cost has been estimated at 2004 prices taking into account the requisite inflation factor. LOCOG is exempted from Corporation tax. However it is registered under VAT and will charge VAT on ticket and merchandise sales. The Government has double faced approach. At one end they intend to make Olympics as source of income. At the other end they encourage private contributions. As per LOCOG 20% of funding will be from sales of tickets. That means Government has also found out a source of earning from a social cause of encouragement of sports.Whereas the House of Commons, Culture, Media, and Sports Committee in its report3 has described ‘the £ 2 billion target by business in sports and leisure, representing the private sector and leisure industry, as “challenging”. These contradictory actions are certainly going take its toll on the performances of organizations participating into the cause. If they spent money, then they deserve the right to earn from their efforts. Whosoever may be funding 2012 London Olympics ‘The London Olympics in 2012 represent a huge opportunity to showcase Britain to the world and to boost the country’s tourism industry before, during and after the games’ (Caterer Search)5. Reference: 1 John Spencer, CEO Red Planet Venture, in an interview Close Up, CTC Newsletter, Vol. 2 Issue 5, March 2006, http://www.usc.edu/org/techalliance/eNewsletter/v2_5.htm 2 Funding, The London 2012 project is delivered by two key organizations- one private. One public, http://www.london2012.com/about/funding/index.php 3 The House of Commons Culture, Media, and Sport Committee, London 2102 Olympic Games and Paralympics Games: funding and legacy, published on 24 January 2007, page 15, http://www.publications.parliament.uk/pa/cm200607/cmselect/cmcumeds/69/69i.pdf 4 Caterer Search, London Olympics 2012, viewed on 4th December 2007, http://www.caterersearch.com/Articles/2006/11/22/310164/london-olympics-2012.html Published accounts of Arriva Plc are at [4000 K] Arriva plc December 2006 English Annual Report Read More