Learning Objectives
Evaluating financial statements and reporting findings (Q1: 1.1, 1.2, & 1.3)
a) Examine the financial performance of a company
b) Calculation of ratios and percentages
c) Analyze the profitability, financial stability and asset utilization of a business
d) Purpose and limitations of financial analysis.
Application of management accounting tools to business decision making (Q2: 2.1 & 2.2)
a) Purpose and limitation of budgets
b) Preparation of a budgeted financial statements
c) Variance report: - calculation - evaluation.
d) Break-even analysis.
(LO2 d is not tested in this assessment)
Q 1: Learning Outcome 3 (a-d): Evaluation of financial statements and reporting findings
This questions has three parts (Q 1.1, Q 1.2, and Q 1.3), each part has sub parts and attempts to address various aspects related to financial statements analysis. Please read the instructions carefully and answer each part.
Q 1.1:
You are a loan officer at Growing Debt Bank. Mary Norton, manager of Borrowers Ltd, is interested in an 8-year loan to expand the entity's operations. The borrowed funds would be used to purchase new equipment. As evidence of the Borrowers Ltd.'s debt-worthiness, Norton provided you with the following facts:
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Item Description
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Year 2017
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Year 2016
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Current Ratio
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2.1
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3.1
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Quick Ratio
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1.4
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0.8
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Asset Turnover
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2.2
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2.8
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Cash debt coverage
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0.2
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0.1
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Profit
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Down 8%
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Up 32%
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Earnings per share
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2.5
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$ 3.30
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When you told Mary Norton that you would need additional information before making your decision, she was offended, and said, "What more could you possibly want to know? You responded that, as a minimum, you need complete, audited financial statements.
Required
a. Discuss the implications of the ratios provided for lending decision you are to make. Does the information paint a favourable picture? Are these ratios relevant to the decisions?
b. List three other ratios that you would want to calculate for Borrowers Ltd, and explain why you should use each.
c. What are the limitations of ratios analysis for credit and investing decisions?
Q 1.2:
The following historical information is an extract from the 2017 annual report of Foster's Group. All figures are in millions of dollars. Use horizontal analysis to describe the trend in revenue and profits.
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Items
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Year 2017
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Year 2016
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Year 2015
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Year 2014
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Year 2013
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Net Sales
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4555.2
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4350.9
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3222.2
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2943.7
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3080.3
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Profit After Tax
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966.2
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1166.2
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919.9
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799.3
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462.9
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Required
a. Using 2013 as the base year, compare the revenue and profit to the relevant starting point (base year). LO3a
b. Analyse and explain each trend separately, and then provide an overall conclusion based on the two explained trends. LO3c
Q 1.3:
Please visit the New Zealand Post Group Annual report 2016 and retrieve the annual reports of New Zealand Post for the year ended 2016 and year ended 2017
Required:
a. Using information from the annual reports, calculate and analyse the following profitability, financial stability and assets utilization ratios for New Zealand Post. Your discussion must include the context and a clear conclusion regarding the profitability, financial stability and asset utilization of the company.
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Formula
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Calculations
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Profitability Ratios
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2017
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2016
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Operating Profit
Margin
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EBIT / Net Sales
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Return on Assets
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EBIT / Average Total
Assets
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Net Profit Margin
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Net Profit / Average
Total Assets
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Return on Equity
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Net Profit / Average Owner's Equity
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Financial Stability
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Debt Ratio
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Liabilities / Total
Assets
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Debt to Equity
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Liabilities / Equity
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Interest Cover (Times Interest
Earned)
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EBIT / Interest Expense
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Assets Utilization
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Assets Turnover
Ratio
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Net Sales / Average
Total Assets
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b. Peter Ming, a financial analyst at one of the leading brokerage house in Auckland is of the view that "Cash flow from operating activities is the critical ratio for financial decision making. If the cash flow from operations is less than the earnings figure, then the company is in a poor financial health and has poor investment prospects. Do you agree with Peter? Explain the reason for your agreement or disagreement. LO3a
Q2. Learning Outcome 4 (a, b & C): Application of management accounting tools to business decision making: Budgeting.
This questions has two parts (Q 2.1 and Q 2.2), each part has sub parts and attempts to address various aspects related to budgeting. Please read the instructions carefully and answer each part.
Q2.1:
The following data has been estimated for Hamilton Limited, who commenced the business on January 1, 2018.
- Estimated Sales: January $ 60,000 February $ 55, 000
Cash sales are estimated to be 30% of the total sales
- Debtors are expected to pay: 40% in the month of sale 60% in the month after sales
- Estimated purchases: January $ 35,000 February $ 39,000
- All purchases are to be on credit and are to be paid for in the month following the purchase.
- Estimated operating expenses are:
Office salaries, January $ 10, 000, February $ 12, 500, paid in cash Depreciation of equipment 25% per year on $ 250,000
- Other information:
The owner contributed $ 85,000 cash to the business on January 1, 2018 The owner intends to withdraw $ 3,000 per month for his private use.
The accountant of Hamilton manufacturers estimates that the firm will need a minimum cash balance of $ 15, 000 in order to maintain the liquidity.
Required:
a. Prepare a schedule of expected cash receipts from debtors for January and February, 2018, support your answer with calculations (You must show a total column for the two months).
b. Prepare a cash budget for the two months ended February 28, 2018 showing the expected cash balance at the end of the each month (you must show a total column for the two months).
c. On February 28, 2018, the business instalment of $ 80, 000 will be due on the new machinery. Will Hamilton manufacturers be able to pay the instalment? Explain your answer with relevant calculations.
Q2.2:
Sweet Limited buys purchases marshmallows for $4 and sells them for 5.5. Sales for Marshmallows (in units) are budgeted as follows: October 22,000; November 27,000; December 32,000; and Jan 30, 000. Actual sales (in units) were: August 18,000; Sept 18,000; Sweets Limited has a target of finished inventory to be 30% of the following month's unit sales. Sales are 90% in cash and 10% in credit. Credit customers pay the month following the sale. Payment for purchases is made two months after the date of purchase. The budgeted cash balance as at 1 October 2018 is $ 17,000.
a. Prepare a sales budget (Units and $) for the quarter ended Oct - Dec 2018 (for the months and total for the quarter) LO 4b
b. Prepare a purchase budget (Units and $) for the quarter ended Oct - Dec 2018 (for the months and total for the quarter)
c. Prepare a cash budget for the quarter ended Oct - Dec 2018 (for the months and total for the quarter)
d. Explain the purpose and at least one limitation of variance analysis.