Accounting and Management Report to the Board of Directors - 1650 Words

Accounting and Finance Management: Report to the Board of Directors (Coursework Sample) Content: Accounting and Finance ManagementNameInstitutionPart A: Grooves Ltd1. Report to the Board of DirectorsFrom the analysis of the companyà ¢Ã¢â€š ¬s financial statement, we have been able to establish its level of profitability, liquidity, gearing and asset utilization. Profitability is a critical element in an organization, and it is the ability of a business entity to earn a profit. Key profitability ratios include the net profit margin, return on assets and return on equity. In finance, liquidity of a business can be assessed from the perspective of its ability to meet its financial obligations when they become due. Common liquidity ratios include current ratio and acid test ratio. A companyà ¢Ã¢â€š ¬s financial leverage is equally important is making rational financial decisions. Gearing or financial leverage shows the extent with which the company is financed by shareholders versus lenders. The companyà ¢Ã¢â€š ¬s financial leverage can be captured by two key rati os: debt-to-equity ratio and debt ratio. The company managementà ¢Ã¢â€š ¬s ability to make the best use of the available resources can best be assessed by primarily focusing on asset utilization. Major asset utilization ratios include fixed assets turnover, inventory turnover and accounts receivable turnover.Table 1: summary of Grooves Ltdà ¢Ã¢â€š ¬s financial ratios for 2013-2014Ratios Formula 2013 2014 Profitability 1. Net profit margin =Net profitSalesX100 =2250001770000X100=12.71% =1605001800000X100=8.92% 2. ROA =Net profitTotal assetsX100 =2250001462500X100=15.39% =1605001462500X100=10.97% 3. ROE =Net profitSh.equityX100 =225000750000X100=30% =160500750000X100=21.4% Liquidity 1. Current ratio =current assetscurrent liabilities =379500298500=1.27 =594000357000=1.66 2. Quick ratio =CA-inventorycurrent liabilities =379500-222000298500=0.53 =594000-354000357000=0.67 Gearing 1. Debt to equity ratio =Total debtTotal Sh.equity =3285001134000=0.29 =4320001192500=0.36 2. Debt ratio =Total debtTotal Assets =3285001462500=0.22 =4320001624500=0.27 Asset utilization 1. Fixed assets turnover =Total salesTota fixed assets =17700001083000=1.63 times =18000001030500=1.75times 2. Inventory turnover =Cost of sales Av.inventory =1020000 222000=4.59 times =1125000 288000=3.9times 3. Accounts receivable turnover =Credit salesAv.alcs receivables =1770000153000=11.57times =1800000193500=9.3times From the computations, it is clear that the companyà ¢Ã¢â€š ¬s profitability was relatively higher in 2013 than in 2014. This can be deducted the fact that all the companyà ¢Ã¢â€š ¬s profitability ratios (net profit margin, ROA and ROE) were higher in 2013 than in 2014. However, the companyà ¢Ã¢â€š ¬s liquidity level seems to be relatively higher in 2014 compared to 2013. This is because; all the companyà ¢Ã¢â€š ¬s liquidity ratios (computed in table 1) are higher in 2014 than in 2013. Equally, the companyà ¢Ã¢â€š ¬s financial leverage (gearing ratios) seems to have in creased in 2014 presenting a higher financial risk. There seems to be a mixed result on the level of the companyà ¢Ã¢â€š ¬s asset utilization based on the compuations. In terms of current asset utilization, the company seems to have been more efficient in 2013 compared to 2013. Although it can be argued that the companyà ¢Ã¢â€š ¬s efficiency (in fixed asset utilization) was higher in 2014 relative to 2013.2. Assessing the companyà ¢Ã¢â€š ¬s working capital cycle is an integral part of financial management. According to Tennent (2010), working capital cycle refers to the time take to convert a companyà ¢Ã¢â€š ¬s working capital (current assets and current liabilities) into cash. WCC is given by:WCC=Inventory turnover (in days) + Days in account receivable à ¢Ã¢â€š ¬Days in accounts payableTable 2: The Companyà ¢Ã¢â€š ¬s WCC for 2013 and 2014Particulars 2013 2014 Inventory tunover (in days) =Av. inventorycost of goods soldX365=2220001020000X365=79.44days =Av. inventorycost of go ods soldX365=2880001125000X365=93.44days Days in accounts receivable =Av. accounts receivableAnnual credit sales X365=1530001770000 X365=31.55days =Av. accounts receivableAnnual credit sales X365=1935001800000 X365=39.24days Days in accounts payable =Av. accounts payablecost of salesX365=900001020000X365=32.21days =Av. accounts payablecost of salesX365=1020001125000X365=33.09days WCC =78.78=79 days =99.59=100days In computing the above WCC, some assumptions have been made. First, since the beginning amounts for inventory, trade receivables and trade payables for 2013 are not available; their end year figures have been taken to represent the average inventory, average trade receivables and average trade payables. Besides, since the information on net annual purchases is not available in both years, the cost of sales is used instead. We also assume that all sales were on credit.From the above computations, it is clear that the companyà ¢Ã¢â€š ¬s WCC (in days) is higher in 2014 than i n 2013. This implies that the companyà ¢Ã¢â€š ¬s liquidity position in 2014 has dropped from the previous year.Part B: Goodfellaà ¢Ã¢â€š ¬s LtdQuestion 1 * Payback periodPayback period=Initial investmentAnnual net cash inflowNet annual cash inflow=Annual cash inflow-annual cash outflowNet annual cash inflow=  £580,000 -  £130,500Net annual cash inflow=  £449500Payback period= £1,500,000.  £449500Payback period=3.337 yearsDepreciation of the machinary has been ignored since it is a non-cash item. * The accounting rate of returnAccounting rate of return=Average profitAverage investmentAnnual depreciation = (Initial investment-salvage value)/Useful of machineAnnual depreciation = ( £1,500,000- £150,000)/6 yearsAnnual depreciation =  £225000Average profit= Net annual income-Annual depreciationAverage profit= ( £449500- £225000) =  £224500Average investment= (Cost of machine+residual value)/2Average investment = ( £1,500,000/2) = £750000Accounting rate of return= £224500 £750000X100Accounting rate of return=29.93% * Net present valueSince taxes are not considered, depreciation will be ignored.Year Net cash inflow PV Factor at 8% PV 1 449500 0.926 416237 2 449500 0.857 385222 3 449500 0.794 356903 4 449500 0.735 330383 5 449500 0.681 306110 6 599500 0.630 377685 Total 2172540 NPV=PV of net cash inflows-Initial investmentNPV= ( £2172540- £1500000) =  £672,540 * Internal rate of returnIRR=Ra+NPVaNPVa-PNVb(Rb-Ra)Where:Ra=Lower discount rate with positive NPVRb=Higher discount rate with negative NPVNPVa= Net present value at RaNPVb= Net present value at RbLet Rb be 22% and Ra be 21%.Therefore, NPVa will be given as follows.Year Net cash inflow PV Factor at 21% PV 1 449500 0.8264 371467 2 449500 0.6830 307009 3 449500 0.5645 253743 4 449500 0.4665 209692 5 449500 0.3855 173282 6 599500 0.3186 191001 1506194 NPVa= ( £1506194- £1 500000) = £ 6194NPVb will be calculated as follows:Year Net cash inflow PV Factor at 22% PV 1 449500 0.8196 368410 2 449500 0.6719 302019 3 449500 0.5507 247540 4 449500 0.4514 202904 5 449500 0.3700 166315 6 599500 0.3033 181828 Total 1469016 NPVb= ( £1469016- £1500000) = £ -30984IRR=21%+ £ 6194 £ 6194+ £30984(22%-21%)IRR=21%+0.1667IRR=21.17% (Two decimal places)Question 2Capital budgeting technniques are arguably coupled with a numb...