Analysis Of Financial Statements For Competitive Edge: A Case Study

Description of Business Operations: Analysis of Financial Statements

Introduction

With the advent of globalization, the business process has tended to become more complex and a competitive one. This necessitates organizations to adopt effective strategies that would not only help to enhance the performance of the business but gain a competitive edge in the market. A thorough analysis of the organization’s current position in the market as well as conducting of competitors’ analysis facilitates the management to get a precise understanding of the financial stability as compared to its competitors. A critical analysis of the financial statements of the organization helps the users of the financial statement in making effective investment decisions. In this regards, attempts have been made in the study to present an analysis of the financial statements of an organization based on a given case study. In addition to that, efforts have been made in the study to illustrate on the different analysis methods other than financial analysis and the limitations faced while conducting the financial analysis.

Notably, the Board of directors of Efficient Distributors Ltd is concerned in light of the financial performance of the organization in the financial year ending 30th June 20X6. It is seen that, the management of the organization was ineffective in keeping the bank overdraft within the limit of $ 12,000. This tends to increases the debt obligations of the organizations. In order to get a clear understanding of the financial performance of the organization a ratio analysis of the financial statements of the organization is presented below:

Ratio Analysis of Efficient Distributors Ltd
Particulars Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Key ratios	Formulas	Ratio
			20X4	20X5	20X6
Profitability Ratio	Return on Equity	Net Income / Shareholder’s Equity	13.33%	7.64%	1.74%
	Return on assets	Earnings before interest and taxes / Assets * 100	13.16%	7.09%	2.09%
	Net Profit ratio	Net Profit / Sales * 100	10.00%	6.11%	1.52%
	Gross Profit ratio	Gross Profit / Net sales * 100	55.00%	53.33%	54.55%
	Selling	Selling and Distribution Expenses / Sales * 100	20.00%	22.22%	27.88%
	Finance	Finance expenses / Sales * 100	7.50%	8.89%	12.12%
Liquidity Ratio	Current Ratio	Current assets / Current Liabilities	1.682926829	1.833333333	2.55882353
	Quick ratio	(Current assets – Quick assets) / Current liabilities	0.682926829	0.785714286	1.11764706
Efficiency ratio	Stock Turnover ratio	Cost of Goods Sold / Average stock	2.195121951	1.909090909	1.53061224
	Stock turnover days	365 / Stock Turnover ratio	166.2777778	191.1904762	238.466667
	Accounts receivable	Net Credit sales / Average accounts receivable	7.692307692	5.806451613	4.45945946

1. i) Profitability ratios:

From the above analysis it is evident that, the profitability of the organization has significantly decreased over the period of three years. It is se4en that in the year 20X4, the organization had a good profitability. However, in the next two financial years, the profitability level has gradually decreased and is a major cause of concern of the organization. This may be due to several factors like increase in the operation expenses. It is noted that the financial expenses of the organization has increased significantly in the current financial year. The management of the organization needs to identify the key issues and accordingly formulate action plan in order to revive from the current situation (Abu-Bakar et al. 2014).

1. ii) Liquidity ratios:

On contrary to the profitability level of the organization over the past few years, the liquidity of the organization has gradually increased. For any organization, the ideal current ratio and quick ratio is 2:1 and 1.1 respectively. This ratio determines the ability of the organization to effectively meet its short term obligations. From the analysis made above, it can be apprehended that, in the current financial year, the liquidity of the organization has increased and is over the head ratio. This indicates that the organization will face no problem in meeting its short-term payment obligations (Damodaran, 2016).

Limitations of the Analysis

iii) Efficiency ratios:

The efficiency ratio helps to determine the ability of an organization to effectively use its assets in order to generate the maximum revenue. It is evident from the analysis, that the efficiency ratio of the organization shows a mixed result. It is seen that, the stock turnover ratio of the organization has decreased over the years. This indicates that, the management is able to effectively turnover or sale its stock in the market. On the other hand, the stock turnover days reflects an increasing trend that indicates that the organization is not able to turnover its stocks. Additionally, the Accounts receivable days indicates that, the management of the organization is ineffective in recover the dues from the debtors (Delen, Kuzey & Uyar, 2013).

It is evident that the financial statements of an organization are prepared based on certain destinations and estimates. Thus, the resultant factors may not be correct in context to the actual scenario and thus, may mislead the users of the information in making wrong investment decisions. In addition to that, since the financial reports of an organization are prepared based on historical financial data, they may not be as useful while corporate planning (Dewachter, Iania, Lyrio & de Sola Perea, 2015).

In context to the financial analysis made above, it can be apprehended that the profitability of the organization has decreased significantly. A comparison of the sales of te4hn year and the net profit earned has been presented in the form of chart below:

From the above diagram, it is noted that, the profitability of the organization has decreased significantly. This may be due to the increase in the financial expenses of the organization. The management of the organization needs to conduct a thorough analysis of the financial requirements of the entity, identify any key issues and accordingly adopt policies that will help the organization to generate more revenue (El Kasmioui & Ceulemans, 2013).

Conclusion

In light of the analysis made above, it can be established that, analysis of the financial statements of an organization forms an integral part while making decisions. It helps the management to get a clear understanding of the current financial position of the organization and thereby make an evaluation of the performance of the organization. Additionally, it will help the organization to improve on the key areas.

a) Ethical problems faced by Tom:

It is evident from the case study that, in recent times Allandale Ltd is facing financial insecurity insights of the events identified. It is noted that, in accordance with their business expansion plan the organization has procured a loan of $ 20 million. Notably, the loan agreement stated that the organization must be able to maintain a current ratio of 2:1 and an after-tax return on assets of at least 10 percent. Failure to comply with the loan agreement at any point of time will compile the organization to pay back the principal loan amount to the bank. This may lead to significant financial instability for the organization. Although it is noted that, in the current financial year, the organization was able to comply with the loan agreement and maintained a current ratio of 2:1 and a return on assets of 11 percent, it is  noted that, certain issues have arisen that may hamper the financial stability of the organization significantly (Johnson, Gruntowicz, Chua & Morlock, 2015).

Additional Information in Context to the Financial Analysis

The stakeholders involved here are as follows:

• The management of the organization
• Tom, the accountant
• The Bank
• The shareholders of the organization

In this regards, Tom, the accountant of the organization noted that, an unsold stock of the organization has a net realizable value of $ 350,000 while the book value of the asset is at $ 500,000. Additionally, a debtor of the organization is seen to be facing a financial crisis and offers to make half payments against their dues of $ 1 million. However, the balance in the provision for doubtful debt is at $ 300,000. In light of this, the accountant of the organization is faced with a dilemma of whether to take into consideration of the losses that the organization. In case Tom recognizes the implications of the issues in the books of accounts, then both the current ratio as well as the return on assets would reduce significantly and as a result, the organization will have to pay back the loan amount. This may significantly hamper the operations of the business and may also lead to loss of jobs for Tom and his best friends. Notably, the current situation gives rise to ethical implications that Tom needs to consider while making the decision regarding recognizing the reduction in the net realizable value of the assets (Kallala et al. 2015).

The values and the principles involved in relation to the given case study is maintaining a ethical code of conduct while evaluating the books of accounts of the organization. Tom is faced with an ethical dilemma of whether to consider the losses incurred by the organization or to alter the books of accounts in order to cover up the losses. In this regards, Tom needs to adopt ethical approaches and accordingly make a decision.

Possible Courses of Action

It is noted that Tom has two possible course of action. They include:

• Take into consideration the losses incurred by the organization
• Alter the books of accounts of the organization

If Tom decides to show the implications in the books of accounts of the organization, then not only it will lead to bankruptcy of the organization but may also lead Tom and his friends to loss their job. However, as an accountant of an organization, he must be ethical in his practices and always deter from frauds or material misstatements in the books of accounts.

In light of the issues identified above, it can be established that, the current financial instability of Allandale Ltd has lead to ethical obligations that needs to be considered while making any significant decision. In context to this, Tom is faced with two options. He can either recognize the reduction is the net realizable value of the identified assets or he can just simply alter the books of accounts as per the needs of the organization (Kou, Peng & Wang, 2014).

Conclusion

It would be feasible for Tom to recognize the reduction in net realizable value of the assets in the books of accounts of the organization (Nesticò & Pipolo, 2015).

Apparently it may seem that, Tom must alter the books of accounts of the organization in order to save it from indebtedness. However, manipulation of the books of accounts of the organization is not an ethical practice and may alter the credibility of the organization. In   this regards, it is feasible for Tom to report the losses in the books of accounts.

Types of accounting software to be designed by Giggling Brothers

In light of the light of the complexity in the business process, organizations need to maintain extensive system of records and other documents. In case of manual record of data, there remains a probability of misstatements in the financial reports or improper recording of the information. In addition to that, if the records of the organization are not maintained safely, then in that case it may lead to serious implications and may hamper the business operations significantly (Vogel, 2014). It is noted that, Giggling Brothers in recent times are facing certain difficulties in regards to proper maintenance of records and data. In view of this, it would be feasible for the organization to opt for computerized accounting system that would facilitate the management to keep proper records of large amount data and information. ERP is noted to be widely used software especially among small organization. Adopting of computerized software like that of ERP with not only help the organization to maintain accurate data but maintain an extensive reporting system of a large database (Stone et al. 2016).

It is seen that, there lies an interdepartmental conflict within the organizational structure of Giggling Brothers. Notably, due to lack of availability of proper information from the accounting the other departments of the organizations tend to suffer and sometimes significantly hamper their operations. In this regard, it would be feasible for v tech organization to adopt ERP san integrated accounting software (Vogel, 2014). This would benefit the organization in several ways and will help to reduce the interdepartmental conflicts. In addition to that, this would help the management in ensuring smooth flow of information within the organization. This in turn would facilitate smooth running of the business operations of the organizations. Additionally, it would help the organization enhance the visibility of the information, maintain an automated workflow, prevalence of a single reporting system, proper unification of data and reduce the operational costs of the organization. Adoption of ERP will help the management to maintain a level of efficiency among all the departments of the organization as well as make forecasts about the future and thereby, formulate policies in order to avoid any contingencies (Yarbro & Mehlenbeck, 2015).

It is noted that, there lies certain organizational disputes within the organization structure of Giggling brothers. This not only affects the operations of the department but also leads to hampering of the operations as a whole. It is seen that, the account department of the organization are not able to effectively maintain proper records of the financial data. Thus, providing wrong information to other departments of the organization might lead to ambiguity and at certain times intra-organizational conflicts. In this regards, it is recommended to the management of the organization to implement computerized accounting system. In this context, they needs to conduct a market research in order to gather information about the best available accounting software and select the best possible that meets the requirements of the organization (Johnson, Gruntowicz, Chua & Morlock, 2015).

For any organizations, it is very important to cater to the needs and the expectations of the various stakeholders of the organization. The primary stakeholders of an organization are its shareholders and thus, it is important for the management of the organization to look after the needs and demands of the shareholders (Vogel, 2014). In regards to the proposed plan of Giggling Brothers, the stakeholders that needs to be included in the development and implementation of the new accounting system includes, the shareholders of the organization, the board of directors of the organization, the employees of all the department and the management. In addition to that, the management of the organization need to take into consideration the suggestions of the shareholders of the organization as well as the board of directors and accordingly formulates policies for the implementation of the proposed plan. This would help the management of the organization in effective implementation of the new computerized accounting system (Nesticò & Pipolo, 2015).

Using Accounting would be of great help to the Giggling Brothers that may help the company to work in an effective way and know the works that are being done by the competitors of the company. The software would be helpful in maintaining the accounting performance of the company, knowing the strategies and the software that are being done by the other companies (Delen, Kuzey & Uyar, 2013). Wine supplies that are being made by the companies are to be well maintained and would need to be recorded on a daily basis, working on manual terms may cause conflict within the companies as it may happen that the records may not be recorded in an effective way and every branch of a company may go through different calculations that may be hard for the company to calculate the works that are being done. In this way using a same type of software may help the company to work in an effective manner and calculations that are being done would be equal and good for the company to work effectively (El Kasmioui & Ceulemans, 2013).

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