Vous êtes sur la page 1sur 12

Accounting and Finance for Manager Assignment 1

Answer to Q 1 Page 2

Answer to Q 2 Page 3

Answer to Q 3 Page 4

Answer to Q 4 Page 5

Answer to Q 5 Page 6

Answer to Q 6 Page 8

Figure 1. Maturity Matching Policy Page 9

Figure 2 the aggressive Financing Policy Page 10

Figure 3 Conservative Financial Policy Page 11

References Page 12

1
Accounting and Finance for Manager Assignment 1

Subject Code : MAF 605

Subject Title: Accounting and Finance for Manager

Assignment : One

In line with the Table One (Income Statement) and Table Two (Balance Sheet) We have to answer the
following questions:-

Question 1

To assess the financial performance of whether healthy snack corporation or not, we have to compute
13 key ratios at least.

Answer to Q 1

1.1 Profitability Ratio

Sr. No Name of Ratio Calculation Y2002 Y2003 Y2004


1 Gross Profit (Revenue-COGS)/ Revenue 9.0% 9.3% 9.2%
Margin
2 Net Profit Net Profit/Revenue 4.1% 4.5% 4.7%
Margin
3 Net Asset Revenue/Total Assets 0.3:1 3.5:1 3.9:1
Turnover
4. Return on Earning before Interest and 49.6% 58.6% 57.4%
Investment Tax/ Capital Employed

Note: Nearest one decimal based on 360 working days.

1.2 Solvency and Liquidity Ratio

Sr .No Name of Ration Calculation Y2002 Y2003 Y2004


1 Capital/Current Ratio Current assets/Current 1.3:1 1.4: 1 1.8:1
liabilities
2 Liquidity/Quick Ratio (Current asset- 0.5:1 0.6:1 0.7:1
Inventory)/Current
Liabilities
3 Working Capital Cycle (Average Working Capital 50 days 44 days 54 days
x365) Sales revenue

2
1.3 Efficiency Ratio

Sr Name of Ratio Calculation Y2002 Y2003 Y2004


No
1 Inventory Turnover (Cost of goods sold/Average 51 days 46 days 48 days
Inventory)x 360 days
2 Trade Receivables (Net Credit Sales/Account 18 days 16 days 19 days
Receivable)x 360 days
3 Trade Payables (Net Credit Purchase/Account 19 days 18 days 13 days
Payable) 360 days
4 Gearing Total Debt/Total Equity 55.1% 41.9% 55.1%
5 Interest Cover EBIT/Interest Expenses 4 times 5.2 times 6.7 times
6 Return on Asset Net Income/Total Assets 12.6% 16.7% 19.3%
7 Return on Equity Net Income/Shareholders’ 50% 49% 46%
Equity
8 Debt/Equity Total Liabilities/Share holders’ 0.3% 0.3% 0.4%
Equity

Answer to Q 2,

2..1 Profitability

The result of increasing sales volume, this has been at the increase of a 0.3% and 0.2% in Y2003 and
Y2004 respectively compared to Y2000, that are quite a significant increase.

The operating profit margin has also increased by 0.5% in Y2003 and 0.7% in Y2004 due to the revenue:
sales ratio rising.

The increased sales are reflected in an improved net assets turn over for Healthy Snack Sdn Bhd, this
despite an increased in long term debt from Y2002 to Y2004.Consequently , this increase in net asset
turn over in good enough to push up the ROCE increase from 49.6% in Y2002 to 58.6% in Y2003 as well
as 57.4% in Y2004.

2.2 Liquidity

Both the current and quick ratios have improved mainly due to the injection of cash from the long term
debts and there does not appear to be any short term liquidity problems for Healthy Snack Sdn Bhd.

2.3 Efficiency

Inventory turnover has decreased this lead to a less working capital cycle. Lots of capital is flowing back
here.

3
Receivable turnover, however did not change significantly except 19 days in year 2004. May be longer
credit terms have been granted to encourage the additional sales.

The payable turnover period has reduced that will please the supplier of Healthy Snack Sdn Bhd, but
combined with the increased receivable turnover in Y2004, this has resulted in a much higher working
capital cycle (from 44 days to 54 days)

2.4 Risks

The increased of RM 25,000 in long term debt in Y2004 has resulted in a higher gearing ratio making the
Healthy Snack Sdn Bhd more risky from a lender/investor point of view. This loan will be help to fund the
increased working capital, in addition to some non-current asset additions in the year. It would be
interesting to know when the loan were increased perhaps the additional non current assets are new
premises only open towards the end of year and Healthy Snack Sdn Bhd should reap the rewards from
this growth next year?

Interest cover has increased as direct result of the slight increase in long term loan and the interest that
has to be paid on them.

As such My opinion is there is a need for financial planning as requested by Vicky.

Answer to Q 3

Specifically, if Healthy Snack Sdn Bhd reduces its payout ratio, it means that Mark and Vicky can
consider retaining more cash from owners’ equity which can be used, in turn, to fulfill financing needs.
With considering the same condition in other things, such reducing dividend payout ratio can lower the
external finance requirement. More importantly, Mark and Vicky need to pay attention on profit margin,
if Healthy Snack Sdn Bhd’s overall revenue remains the same that would transform into less internal
cash. This might increase the overall financing need and raise the external financing requirement too.

Alternatively, the Healthy Snack Sdn Bhd can reduce the investment capital whereas it is difficult for
Healthy Snack Sdn Bhd to increase profit margins. It is easier for Mark and Vicky to consider the
company to increase their return on capital invested by decreasing the amount of invested capital.
Healthy Snack Sdn Bhd can reduce the amount of invested cash amount in many ways. Healthy Snack
can simply dispose assets however the sales of fixed assets can mean that the company loses them.
They need to remember that the company cannot run business without main assets and customers.

In conclusion, the followings are the actions that Mark and Vicky can take in order to alleviate some of
the needs for external financing:

- The reduction the capital invested via credit and cash management.
- The reduction the capital invested in intangible and tangible asset via leasing and finance the
asset.

4
- Outsourcing in general.

Answer to Q 4,

Assumption 1. It is critical to understand that all 3 financial statements are linked and connected
indicators of the company risk, feasibility and profitability too.

Solution : As Healthy Snack go through the preparation of their business plan and financial documents,
they will need to have document and soft of information resulting to create those documents.

Assumption 2. Monthly or weekly forecasts may be necessary when the Healthy Snack Sdn Bhd is just
starting or if their business is facing difficulties or rapid growth.

Solution : Frequently forecasts help Healthy Snack Sdn Bhd to monitor their figures and development
strategies closely and rectify any financial problem before they lock up in major financial crisis.

Assumption 3. The better the accuracy of the key information/assumption that is utilities in the first ever
planning stages of the Healthy Snack Sdn Bhd, the greater will be their ability to make better economic
decisions moving forward. They can use their suppliers and other contacts to assist in collecting up to
date financial information for their financial forecast.

Solution: Not all expectation s need a detailed break down. Their financial professional will assist them
in finding the best financial tools which are suitable for Healthy Snack requirements.

Assumption 4. The source of debt and or equity

Solution : Address in the start up of any new business venture and or expansion for Healthy Snack Sdn
Bhd.

Assumption 5. Advice to develop a financial spread sheet and shows the amount and timing of
contribution.

Solution: Spreadsheet is able to show contributions and formation of the Healthy Snack through the
planning period.

5
Answer to Q 5

To justify the figures under the condition of 40% growth in sales for Y2005,

The Healthy Snack Sdn Bhd Income Statement for the year
ending 31 December Y2005

RM
Sales 7,050,000
Cost of Goods Sold 5,040,750
Gross Profit 2,009,250
Operating Expenses 357,500
Fixed Expenses 90,000
Depreciation Expenses 25,000
EBIT 1,536,750
Interest Expenses 66,000
EBT 1,470,750
Tax @ 40% 588,300
Net Income 882,450
Retained Earning 351,840

Remark:

1. 40% growth in sales for Y2005 to RM 7,050,000


2. Cost of goods sold increased by 30% due to increase in sales RM 5,404,750
3. Y2005 Gross Profit growth by 59% compared to Y2004 the total GP reached to RM 2,009,250
4. Operating Expenses and Fixed Expenses assumed to be remained the same for Y2005.
5. EBIT increased by RM 1,104,250 which is 72% higher than previous year.
6. Interest Expenses remained the same
7. EBT increased to RM 1,470,750 due to higher revenue for Y2005.
8. Total Net income reached at RM 882,450 in Y2005.

6
The Healthy Snack Sdn Bhd Balance Sheet for the year Ended 31
December 2005
RM
Assets
Cash and Cash Equivalent Account Receivable 84,000
Account Receivables 325,541
Inventory 639,375
Total Current Assets 1,048,916
Plants and Equipment 560,000
Accumulated Depreciation 200,000
Net Plant and Equipment 385,000
Total Assets 2,193,916
Liabilities and Equity
Account Payable 151,000
Notes Payable 325,000
Other current liabilities 53,066
Total Current liabilities 529,066
Long term debt 275,000
Total liabilities 804,066
Owner’s capital 155,560
Retained earnings 1,234,290
Total Liabilities and Owner’s Equity 2,193,916

Remark:

1. Cash and Cash Equivalent increased by RM 24,000 due to rise in net income.
2. Accounting Receivables increased to RM 325,541 as the company sales on credit increased.
3. Inventory level goes up due to more stock holding to fulfill the sales growth
4. Plants and equipment remained the same amount.
5. Total asset increased by RM 987,000 to reach RM 2,193,916.
6. For the liabilities, payable amount increased by RM 16,000 due to increase in trading compared
to Y2004.
7. For Note payable reached RM 325,000 because of the company buy more inventory for resale
purpose.
8. Total retained earning go up sharply compare to last year which is RM 1, 234,290 in Y2005.

7
Answer to Q 6.

6.0 Working Capital Management

From the managerial accounting strategy aspect, its focus on retaining efficient amount of all
components of working capital, current asset and liabilities in all respect, Working capital management
to ensure the company to maintain the sufficient cash flow in order to meet their short-term loan
obligations and other operating expense. (Doshi 2009)

6.1 Meaning of Working Capital Management

- Working capital is the amount of cash that available in the company to meet their day to day
operations.

-Working capital is the difference between cash equivalent or convertible cash( Current Asset) and
company commitments for which cash will be required soon (Current Liabilities).

-It indicat3es that the level of current assets that over current liabilities (CA-CL)

6.2 Concept of an optimum working capital policy

Working capital management is a significant aspect of financial institution. For the Healthy Snack Sdn
Bhd, cash is required for non-current assets and working capital. Non-current assets include plant and
equipment land and premises, fixture and fitting etc. Non-current assets are purchased to be retained in
the company for a long period and generate the return over the economic useful life of such assets. The
main purpose of working capital management is to set the optimum level of working capital needed. In
general, management of working capital means how company manages their current assets.

The Healthy Snack Sdn Bhd is able to minimize interest expensed and or increase the fund capital
available for expend the business by reducing the amount of funds associate in current assets. Much
Healthy Snack managerial effort is to expend in getting non optimal levels of current assets and liabilities
back to optimal levels. An optimal level is the one which can achieve a balance between risk and
efficiency.

6.3 Maturity Matching Policy

Maturity matching approach of working capital management is an idealistic way. Under this approach,
the long term assets are used to finance with long-term sources of finance such as term loan, equity and
debentures etc. Short term funds are used to finance with short term sources of finance for example
cash credit, current liabilities or bank overdraft etc.

8
Short-term financing
DOLLAR AMOUNT

Current assets

Long-term Financing

TIME

Figure 1. Maturity Matching Policy

6.4 Optimum Level of Funds (Liquidity)

The funds remain on the statement of financial position only until they use. They are paid as soon as
they are not required. This is how the company’s interest expenses are optimized in this approach.
Interest cost is paid only for the time and amount for which amount of money is used. However , it is
one the best approach but it is very difficult to use. (Borad, 2014)

6.5 The Aggressive Financing Policy

Aggressive policy is a high risk of managing the working capital financing while short term loans are
using not only to fund the short-term working capital but also a part of permanent working capital. In
this policy, trade receivables, level of stocks and balance at bank are just enough with no cushion for
insecurity. Under this strategy, the expenses of interest is low as of the highly usage of short term
finances. The rate of interest cost is lower and even in off season, the loan can repay and no idle funds.
However, this policy can bring the company to meet the high level of liquidity risk because the non-
current assets are financed by short-term financing source (Borad 2014)

9
Fluctuating current assets

Short-term

borrowing
Capital (USD)

Permanent current asset Long-term

borrowing +

equity

Fixed assets capital

0 Time
Figure 2 the aggressive Financing Policy

6.6 The Conservative Financial Policy

This approach is risk free policy of working capital financing. An organization can adopt this strategy to
maintain higher level of asset (current) and thus higher level of working capital as well. The main part of
the working capital is funded by the long-term source of finance such as debenture, equity or term
loans. Hence the level of risk associated with short-term funding is stopped to greater extent. In this
strategy ,non-current assets, part of permanent and temporary working capital is funded by long term
financing and the rest of the part only is funded by short term financing sources (Borad 2014)

In this policy, the level of current assets and working capital is higher. Higher level of stock can fulfill in
production plans as well as production sales. This can achieve to satisfy the higher level of customer
satisfaction and the company operations. (Borad 2014)

10
USD Marketable Securities

Zero S-T debt

Perm C.A. L-T Fin: Stock,

Bonds, Spon.C.L.

. Fixed Assets

Years

Figure 3 Conservative Financial Policy

11
References

Fay, M. (2012), Education and Training Sector Opportunities in Myanmar, [online] Available at
http://www.afgventuregroup.com/dispatchs/afg-venture-group-newsletter/education-and-training-
sector-opportunities-in-myanmar-michael-fay-director-and-head-ofeducation-services-afg-venture-
group/ [22 Dec2014].

FDS (2014), Reasons for Franchising your Business, [Online], Available at :


http://www.fdsfranchise.com/reasons-to-franchise-your-business.htm [Accessed 20 Dec 2014]

Gappa, B. (2014) What is Franchising?, [Online], Available at

http://www.fdsfranchise.com/articles/what-is-franchising.html [Accessed 20 Dec 2014]

KPMG (2012), Infrastructure in Myanmar, Available at:


http://www.kpmg.com/MM/en/IssueAndInsights/ArticlesPublications/Documents/Infrastructure-in-
Myanmar.pdf/ [20 Dec 2014]

12