Market Performance of the Companies - Essay Example

MFRD Task Recommendations Monthly cash budget for 6 months ending August 2008 drawn above shows a positive monthly ending balance. The ending balance is growing every month. Accordingly at present scale of business the liquidity of the business is enough to meet the monthly cash liabilities. However as the business will expand, the following points have to taken care of with regard to liquidity of the company: Current liabilities should not be more than half of the currents in order to maintain current ratio of 2:1 Quick assets that current assets less inventory should not be less than current liabilities. That is to say quick ratio should be maintained in the ratio of 1:1. Credit period with regard to receivable and payables should not be stretched beyond a level when the firm has to face a cash crunch. As far as possible the actual cash transactions should surround the budgeted transactions, and the any extraordinary differences should be taken care of instantly. Task 2 a) Ratio calculations b) Analysis of Performance of the company The performances of NB have been analyzed on basis of profitability, liquidity, and efficiency in carrying its operations. Profitability wise, the company has earned gross profit of 30% and net profit after taxes of 3.08 % of the sales. Both the ratios are lower than industry average of gross profit and net profit of 35.23% and 4.73% of sales respectively. Further NB has earned 12. 88% on capital employed as against industry average of 18.5%. According the profitability performance of the company is quite inefficient when compared with industry averages. Liquidity is the strong point of NB and it can be said that the company is in a position to meet it current obligations as and when those become due. The current ratio of NB is 2.14: 1 and that is quite strong when compared with industry average of 1.9: 1. Similarly the company’s quick ratio of NB is 1.52 as against industry average of 1.27. It has established that current ratio of 2:1 and quick ratio of 1:1 is considered optimum for any industry, and in case of NB both the ratios are above the required standard. Therefore NB can be considered as a solvent company that will meet its current liabilities as and when those become due. For analyzing the efficiency of the company four ratios are considered in this assessment. Total asset turnover that analyzes the effective utilization of total assets in generation of sales is 3.13 times and that is marginally behind the industry average of 3.91. Stock turnover ratio reflects liquidity of the stocks of the company. The company has rotated its stocks during 2008 for 13.93 times as against industry average of 18.3 times. Therefore company lacks efficiency on the aspect of rotating its stocks to meet cost of sales as per industry standards. As far as credit period is concerned, the company takes 40.43 days in collection of credit sales as against industry average of 52 days. On the other hand suppliers provide 36.9 days of credit for purchases and the industry average is 49 days. In other words company is managing credit sales collection and credit purchase payments quite effectively, and probably that is the reason for its sound liquidity. Above all 44.55 % of total assets have been financed by debt capital. The industry average is lower than this of 32.71. However, the company can be said to be low- geared as the less than 50% of assets have been financed by debt capital. Task 3 Payback period calculations Project A Project B £ £ Initial Investments 80000 110000 Cash in flow: Year 1 20000 23000 2 24000 29000 3 27000 35000 4 20000 35000 5 17000 23000 6 11000 20000 Total 119000 165000 Both projects have similar payback period of 4 years. Accounting Rate of Return Profit after tax ARR = ------------------------------ % Book value of investment Cash in flow are assumed to be profits after tax for each of the projects. Project A B 1/6(119000) 1/6 (165000) ARR = ------------- % ------------- % 80000 110000 Or 24.79% 25.0% Project B has higher Accounting rate of return of 25%, even though acceptable return to the company is 11 % Net Present Value The outcome would change when the Net Present Value method is used. This is because under NPV the present value of future cash in flows are considered to find out NPV As per NPV method project B has more NPV than project and thus project B is acceptable. Incidentally even as per ARR project B has more accounting return. Therefore under both circumstances project B is preferable than project A. Task 4 Task 5 A) Objectives of financial statements Normally three financial statements are prepared for an entity, namely, Income Statement (also called Profit and Loss account), Balance Sheet (also called Statement of Positions), and Cash flow statement Income statement or Profit and Loss account is prepared for the accounting period. Normally this period is for 12 months, but interim statements may be prepared for shorter period as well. The main objectives of income statement are as under: To evaluate the revenue transactions for the accounting period in order to find out total earnings and expenditures during the accounting period under different heads of accounts. To evaluate depreciation on fixed assets employed for the business and treat that depreciation as part of total expenditures for the period. To compare the total expenditure with total income to find out net profit earned or loss incurred by the entity. To calculate current and deferred taxes on the current income earned. To calculate the net earnings available to shareholders or owners of the entity. Balance sheet that is also now known as Statement of positions is prepared as at the end of the accounting period for the following objectives: To ascertain the total current and non- current assets. To ascertain current and non- current liabilities. To ascertain net current assets employed in the business. To ascertain total assets and total liabilities of the entity , and To find out the total equity (owners’ capital) employed with the entity. Cash Flow Statement, like income statement, is prepared for the accounting period. It reflects cash inflow and outflow under the following heads of transactions: Operating activities, Financing Activities, and Investment activities of the entity. The objective is to calculate net cash in flow or out flow from above activities during the period and after adjustment of such net surplus or uses of cash flow with beginning cash balance, the cash balances at the end of the period are calculated. B) Differences between Financial statements of different entities like Sole Trader, Partnership, and a limited company are discussed as under: Sole Traders Financial statements may be prepared in vertical or horizontal shape. Horizontal shape is also called T- shape of financial statements. There are no statutory requirements for a sole trader with regard to format of financial statements. Financial statements may be prepared on cash basis of accounting or accrual basis of accounting. Some time a separate trading account is also prepared in order to find out gross profits. Mostly trading account forms part of upper section of Profit and loss account. From gross profit calculated indirect expenses and overheads including interest on loans and depreciation on assets is deducted to compute net profits. Balance sheet prepared as on the last date contains different assets and liabilities of the entity. It is not necessary to present assets and liabilities as current and non- current assets and liabilities, but normally these accounts are listed in balance sheet starting with most liquid and current assets, and same is the case for liabilities. The difference between total assets and total liabilities is the capital employed by the sole trader. Capital may be bifurcated showing beginning balance, addition to capital during the period and adding / subtracting there from the net profits/ losses. Thereafter the withdrawals of the traders are deducted to find out ending capital of the trader. Partnership Like the financial statements of a sole trader there are no statutory required formats of financial statements of a partnership firm. Those are normally prepared in the same fashion as for a sole trader except for the following differences: The net profits losses are divided among the partners in their profit and loss sharing ratios as described in the partnership deed. Capital employed in the firm is shown in balance sheet for each of the partner in same fashion as of sole trader described above. Limited Companies Financial statements formats of limited companies are governed by the statutory provisions and rules framed under: The companies act, 2006 UK Financial Reporting Standards (FRS) International Financial Reporting Standards (IFRS- earlier known as IAS) as applicable to listed companies. There are four financial statements, namely, Income statement, Statement of recognized income and losses, Balance Sheet, and Cash Flow statement. Financial statements are strictly required to be prepared under accrual basis of accounting. However those are normally prepared in vertical shape under the following heads of assets, liabilities and equity capital: Income Statement may contain revenue, cost of goods sold, gross profit, operating expenses, operating profits before interest and taxes, finance expenses and income, taxes, and earnings available to shareholders. It is also necessary to show earning per share both basic and diluted. Balance Sheet contain current assets, non- current assets, total Assets, current liabilities, net current assets, non- current liabilities, and total equity contributions. Notes to the accounts and declaration of Significant Accounting policies are important segment of financial statements of limited companies. C) Accounting for multi – national companies is governed not only by the laws of the country in which those are registered but also by the laws of those countries where subsidiaries of such company exist. Naturally the GAPP of home country as well as other countries along with IFRS become application while maintaining accounts of a multi- national company. While preparing the group financial statements of such a company the important things to take care of are the following: Taxation liabilities under tax statues of different countries, foreign currency translations, and specific requirements of stock exchanges of countries where the company is listed. Read More