Assignment: Financial Analysis
The Final Project for this module is a consultancy report to Anthony's Orchard, an expanding apple orchard and distributor. The company has been entertaining the idea of expanding its product line to include apple juice. In order to do this, a major investment in an apple press is needed. The aim of your consultancy report is to analyse all relevant data and make a recommendation to the management of the company in regard to this idea. Each of the remaining Individual Assignments Submission in this module will focus on one component of this consultancy report; in Unit 6 you will compile these, complete your analysis and submit the Final Project.
Measuring and regularly monitoring the financial health of a company, using budgeting and control methods, is a vital concern for managers. By acquiring and analysing timely and accurate financial data, decision-makers will have the tools to facilitate operational and strategic decisions. These decisions may concern reactions to business or environmental conditions, resource acquisition, expansion and more.
This Individual Assignment will provide the opportunity to analyse financial data for Anthony's Orchard. As you heard from company CEO Bob Frost in this unit's media piece, Anthony's Orchard would like to make aggressive plans for its future, including the expanded product offering described above. At the same time, unforeseen circumstances can impact the current health of the company as well as its future plans.
What-if analyses are valuable aids in assessing a variety of planned and unplanned events. You will utilise the analysis you conduct here as part of the Final Project.
To prepare for this Individual Assignment:
1. Review the readings and media for this unit, including the Anthony's Orchard case study media.
2. Familiarise yourself with the Anthony's Orchard company and its current situation; this can be done by exploring each of the tabs across the top of the screen in the Anthony's Orchard case study media. Hint: You should focus on the financial information.
To complete this Individual Assignment:
1. Review the Financial Statements: Analyse the current financial state of Anthony's Orchard and evaluate the impact of a major customer cancelling their expected order. This analysis should include the following:
Your view of the current financial health of the company Your assessment of the materials and labor costs
Your assessment of the income statement Your assessment of the cash flow statement
Your assessment of each of the business units in Anthony's Orchard C-V-P analysis of the current year's financials
2. Conduct a What-If Analysis: This what-if analysis concerns an unforeseen circumstance that could impact the company's current health as well as its future plans. A major customer is considering cancelling their order for prepared apple products. This customer accounts for 25% of the prepared apple product revenue. Evaluate the impact of this on the budgeted statements contained in the case study.
1. The provided budgets although not dated, they are applicable to the current year, 2011.
2. Administrative costs are allocated to the three business units using the provided transfer pricing formula.
3. Interest on debt is allocated in proportion to total expenses (variable and fixed costs) of each business unit.
4. The provided balance is for the year 2011.
5. If customer cancels order (the 25%), all variable costs and apple purchases are reduced in proportion (25%). Fixed costs remain unchanged.
6. Further assumptions made.
Part 1: Your view of the current financial health of the company
- All analysis must be done on spreadsheets.
- Once done, then you can check the financial health of the company using the following:
- Complete ratio analysis using 2011 financials (balance sheet, income statement and cash flow). Profitability, liquidity, management effectiveness, gearing and risk and cash flow ratios. If possible, find a similar company to compare with. Comment of the ratios.
Part 2: Your assessment of the materials and labour costs
- Compare 2011 unit and total materials and labour costs with those of 2010. Total costs of materials and labour should also be compared with the budgeted (see variance analysis below).
Part 3: Your assessment of the income statement
- Construct detailed budgeted and 2011 income statements as follows: 1). Breakdown the cost of goods into individual components: materials, labour and variable overheads. This information is available on the cost of goods sold budgets and actual cost for 2011; 2). The factory overhead cost is split into variable and fixed components (see cash flow statements);3). Apportion administrative costs using the provided transfer pricing formula. Please note that these costs are to be allocated to the three business units, so use the step down approach until all costs have been allocated to the three business units. 4). then allocate interest on debt in proportion to total products expenses. Analysis up to net profit before taxes.
- For income statement analysis, do ratio and simple variance analysis of the detailed income statements: compare budgeted income statement items with the actuals for 2011.
- Refer to ratios calculations above.
Part 4: Your assessment of the cash flow statement
- Reconstruct the cash flow, ensure that it balances.
- For income cash flow statement analysis, please do ratio and simple variance analysis of the detailed cash flow statement: compare budgeted cash flow statement items with the actuals for 2011.
Part 5: Your assessment of each of the business units in Anthony's Orchard
- Do product profitability analysis for both current year and budget: Use the detailed income statement constructed above.
- Ratio and Variance Analysis: Use ratio and variance analysis to evaluate the performance of each business unit.
Part 6: C-V-P analysis of the current year's financials
- Complete CVP analysis must include: BEP in revenue and sales units and margin of safety (MoS) in both revenue terms and in sales units.
- CVP analysis per business unit with administrative expenses and interest on debt allocated as above.
- CVP analysis with all fixed costs treated as common costs (unallocated): this is multiproduct CVP analysis.
Part 7: What-if-analysis
- Analyse the impact on current financial statements: income statement, cash flow and balance sheet.
- What will be the impact on calculated variances and ratios? (That's why it is important to use spreadsheets).