ACC00724 Accounting for Managers Paper Editing Services

ACC00724 Accounting for Managers Paper Editing Services

Introduction:

This assignment involves an understanding of analysis of accounting transactions and analysis of financial statements. The first question involves interpretation of financial statement of Nimbin Pty Ltd. through financial ratios (including profitability, liquidity and gearing funds). The ratios are further compared with the industry average as presented. The second question involves an understanding of the accounting transactions and its effect on the financial statement namely statement of financial position, statement of income statement and statement of cash flow. Thus, there is a thorough understanding of accounting effects and of a financial technique for financial interpretation. 

Question 1:

A.  Calculate the following ratios for 2014. The industry average for similar businesses is shown.

The details of Nimbin Pty Ltd. are presented below. The details are taken from the financial statements namely income statement, balance sheet, Statement of equity. These details would be used for calculating required financial ratios and to further compare with the industry average:  

Following chart presents the formula of ratios and a comparison of the financial result of Nimbin Pty Ltd. from the industry ratios as are provided:

Summary: The above chart presents the industry ratios and ratios formula and ratios calculation for Nimbin Pty. Ltd. Overall, it can be assessed that the company is more or less performing equivalent or much better than the industry ratios. There are only a few ratios where the organisation underperformed such as time interest earned, inventory turnover and debt ratio (Healy, and Palepu, 2012).

Assumptions:

1.Dividend yield and dividend payout has been calculated over the ordinary shareholder's equity and not over preference share capital.

2.Dividend per share is calculated only for the equity portion and number of shares of equity are taken only (which is 7,200,000 shares)

3.Total net sales are considered as credit sales in absence of any information (Higgins, 2012).

B. Given the above industry averages, comment on the company’s profitability, liquidity and use of financial gearing.

Nimbin Pty Ltd. is an organisation which has become more financially sound as a comparison to the last year. The comparison of the organisation with its industry will be in three contexts, namely profitability, liquidity and use of financial gearing. Profitability defines the ability of the company to turn its revenues into profits and its capability to earn incomes through the expenditures made by it (Brigham, and Houston, 2012).   

Liquidity ratios describe the ability of the organisation to pay back its financial obligations on time. The ratios which usually define liquidity are a current ratio, quick ratio and sometimes cash ratio as well. Use of financial gearing is a measure by which an owner finances its operations through debts funds and does not dilute its equity portion (Brigham, and Houston, 2012).     

Profitability: In terms of profitability ratios, the company is earning more net profits than the average industry by 3.93% which presents that company is capable of turning its sales into profits. Apart from it, other ratios of Nimbin like return on assets is also higher in comparison with the industry by 4.16%, these shows that company is quite effectively using its assets in generating income (Deegan, 2013).  

The average receivable turnover of the company is also higher by the industry by 1.15 which shows that the company is quite capable in credit sales and then timely collects funds from them and also, the company has a lower inventory turnover from the industry by 0.96 which means that the company is little slower in converting its inventory into sales and then sell it further. For improvement in this ratio, the company need to improve its manufacturing processes and sales (both credit and cash sales) (Deegan, 2013).   

Liquidity: In terms of liquidity, company’s ratios are slightly down from the industry. The industry has an ideal current ratio of 2.5:1 and quick ratio of 1.3:1where Nimbin has 2.21:1 and 0.99:1 respectively. The difference is not big which shows that company is capable of paying back its liabilities but it must put in more efforts to maintain these figures and also reach the industry figure (Bonin, 2013).

Use of financial gearing: the debt ratio presents that the percentage of debts funds used to finance the assets of the company. This ratio is lower from the industry by 6.79%. On industry average, the company can finance fixed assets by 40% while Nimbin has financed its fixed assets through debts funds by 33.21%. This shows that Nimbin has used lower debts funds and has low financial obligations as a comparison to the industry number. It can increase use of debt funds which will, in turn, improve profitability and will result in shareholder’s wealth maximization as well (Bonin, 2013).  

Nimbin has shown excellent performance in providing a return on equity. The company significantly excelled from industry return by 40.58%. Currently, on average the industry is providing a return of 20% to its ordinary shareholders whereas Nimbin is providing 60.58% so as the EPS is also higher by 15c (Weil, et. al., 2013).

The investors are also anticipating higher growth from the organisation. As the average price-earnings ratio of the industry is 12 while the company has a P/E ratio of 20 which is higher by 8. The increasing revenues and profits and increase in market values are a major reason behind such high investor’s faith (Macve, 2015).  

As far as dividends are concerned, the company is not providing dividends as per industry average. The dividend yield of the industry is 5% while Nimbin is providing 3.13% only and also despite good profitability and liquidity, the dividend payout is lower than the average by 8.06.  

As far as time earned ratio is concerned industry has an average of 6 which means 6 times the interest expenses can be paid off from the EBIT but Nimbin has lower time interest earned which is 5.02, the difference is due to lower liquid funds (Macve, 2015).

In terms of asset turnover, the company is little higher than average. The company has a ratio of 1.9 while the industry average is 1.8. Both are quite same, which shows that Nimbin is effectively using its assets in generating revenues for the organisation (Macve, 2015).

Question 2:

a) A local restaurant is noted for its fine food, as evidenced by a large number of customers.  A customer was heard to remark that the secret of the restaurant’s success was its fine chef.  Would you regard the chef as an asset to the business?  If so, would you include the chef on the balance sheet of the business and at what value?  

In the words of Flamholtz, (2012), Every organisation (specifically service sectors) requires human knowledge and skills to further its goals and for generation of revenues. Despite having machines and artificial intelligence, there is a requirement of human resource for channelizing the operational processes.

In the current scenario, a restaurant has high customer retention ratio and generates high revenues through its food and through its fine chef. The restaurant is mainly dependent on its chef for accomplishing its objectives and for achieving good profits/ liquidity. Thus, it can be ascertained that the market value of the restaurant is mainly due to its human capital (Tan, 2014).  

Figure 1: describing human capital role

In accordance with my view, Chef must be placed on the balance sheet under the heading of “intangible assets”. The value of the human capital depends on the existing skills and further training/ orientation provided to human capital for the furtherance of knowledge and skills. In the current scenario, the value of Chef can be calculated by measuring the return on the human capital investment by using the following formula (Tan, 2014).

=Total company’s profits (net profits)/ investment on human capital 

1.Net profits of the company are the value which is ascertained after deducting all the incomes/ expenditures made in a specific financial year.

2.Investment in human capital includes expenditures which are made over recruitment/ selection, compensation, training/ development (if any) (Tan, 2014).

b) Indicate the effect of each of the following transactions on any or all of the three financial statements of a business.

Purchase equipment for cash:

This transaction would affect two statements namely, statement of financial positions and cash flow statement. In a statement of financial position, there will be an addition of equipment (in non-current assets) and reduction of cash (in current assets).

In the cash flow, there will be outflow/ reduction of cash under the head operation of “cash flow operating activity” as an equipment is purchased. Thus, there is “increase total asset” and “decrease cash flow” (Eccles, et. al., 2012).

Provide services to a client, with payment to be received within 40 days:

This transaction would affect the statement of financial position and statement of income statements. In a statement of financial position, there will an increase in the current liabilities under the heading “accounts payable” and in the income statement, there will “increase in income”. Thus, there will be “increase in income” and “increase in current liability”. 

Pay a liability:

Paying off a liability means that there would be a cash outflow i.e. “decrease in cash “and simultaneously “decrease in liability”. Thus, it is ascertained that this transaction would affect the statement of cash flow and statement of financial position. In cash flow, there will be an outflow of cash under the heading of “cash flow from operating activities” and there will be “decrease of cash”.

In a statement of financial position, there would be a decrease in liabilities under current or non-current liability as well as the reduction of current assets in Cash and cash equivalents (Eccles, et. al., 2012).  

Invest additional cash into the business by the owner:

This transaction would affect two statements namely, cash flow and statement of financial position. In cash flow statement, there will be an inflow of cash and there will be “increase in cash”. On the statement of financial position, in the liability side, there will be an increase in proprietor funds and in assets increase in current assets in cash side (Eccles, et. al., 2012).

Collect an account receivable in cash:

This transaction would affect the statement of cash flows and statement of financial position. In the cash flow statement, there will an inflow of cash under the “Cash flow from operating head” and there will be “increase in cash”. In the statement of financial position, there will be “decrease in current assets” in the “accounts receivable head” and simultaneously an “increase in current assets” under heading “cash and cash equivalents” (Barnett, and Salomon, 2012).

Pay wages to employees:

This would affect the state of the income statement. Payment of wages is an expense for the company and therefore would be debited and presented in the income statement. There would be “increase in expense” (Barnett, and Salomon, 2012).

Receive the electricity bill in the mail, to be paid within 30 days:

This transaction would affect the statement of income statement and statement of financial position. In the income statement, there would be debited of an accrued expenses or utility expense and will reduce the net income or “decrease in income”. Further, in the statement of financial position, there will be increase in current liability by “accrued expense” and “increase in current liability” (Atmeh, and Abu-Serdaneh, 2012).

Sell a piece of equipment for cash:

This would affect cash flow statement, statement of financial position. In a statement of cash flow, there will be a cash inflow “under heading cash flow from investing activity”. Thus, there will be “increase in cash”. In the statement of financial position, there will be “decrease in non-current assets” and “increase in current assets” i.e. in cash (Atmeh, and Abu-Serdaneh, 2012).

Withdraw cash from the owner for private use:

This statement would affect cash flow statement and statement of financial position. In the cash flow statement, there would “decrease in cash” under the heading investing activity. It will also impact statement of financial position, there will “decrease in equity” in the “proprietor funds” and there will be “decrease in current assets” (Atmeh, and Abu-Serdaneh, 2012).

Borrow money on a long-term basis from a bank:

This transaction would affect the statement of cash flow and statement of financial position. In a statement of cash flow, there would be an increase in cash flows under the financing heading. In the financial position, there would increase in “non-current liability” under the interest-bearing liability and in assets side, there would be an increase under a cash or might increase in fixed assets (Atmeh, and Abu-Serdaneh, 2012).

Figure 2: describing accounting treatment

Conclusion:

With this assignment, it can be concluded that financial tool of ratios depicts the financial performance of an organisation. The comparison of Nimbin pty ltd with the industry average presents that the company has shown quite good profitability and is also gaining the trust of shareholders but the company need to put efforts for maintaining the liquidity and also improves its dividend policy for gaining futuristic trust and faith of shareholders. The company is also capable of taking debts funds for financing its fixed assets and can safeguard itself from diluting its stake in share capital. The analysis of accounting treatment of different transactions has provided information about the inter-linking and inter-dependency of different statements of annual statements. Thus, there was huge understanding of the accounting treatments and financial statement and interpretations.

References:   

1.Atmeh, M.A. and Abu-Serdaneh, J.A.R., 2012. A proposed model foraccountingtreatment of Ijarah. International Journal of Business and Management, 7(18), p.49.

2.Barnett, M.L. and Salomon, R.M., 2012. Does it pay to be really good? Addressing the shape of the relationship between social and financial performance. Strategic Management Journal, 33(11), pp.1304-1320.

http://www.masstlc.org/leveraging-human-capital-management-analytics/. (Accessed as 3.Becker, J., 2017. Leveraging Human Capital Management Analytics. [Online] masstlc.org. Available at:on:09^thDecember,2017).

4.Bonin, H., 2013. Generational accounting: theory and application. Springer Science & Business Media.

5.Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.

6.Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

7.Eccles, R.G., Krzus, M.P., Rogers, J. and Serafeim, G., 2012. The need for sector?specific materiality and sustainability reporting standards. Journal of Applied Corporate Finance, 24(2), pp.65-71.

8.Flamholtz, E.G., 2012. Human resource accounting: Advances in concepts, methods and applications. Springer Science & Business Media.

9.Healy, P.M. and Palepu, K.G., 2012. Business analysis valuation: Using financial statements. Cengage Learning.

10.Higgins, R.C., 2012. Analysisforfinancial management. McGraw-Hill/Irwin.

11.Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

https://study.com/academy/lesson/recording-business-transactions-in-accounting.html. (Accessed as 12.Study.com, 2017. Recording Business Transactions in Accounting. [Online] study.com.  Available at:on:09^thDecember,2017).

13.Tan, E., 2014. Human capital theory: A holistic criticism. Review of Educational Research, 84(3), pp.411-445.

14.Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.