Financial Evaluation Of The Hypothetical Company SSS: Ratio Analysis & Reporting Standards

Profit and Loss a/c of SSS as at 31st October, 2013

Discuss about the Essay for Financial Evaluation of The Hypothetical Company SSS?

The assignment is about the Financial Evaluation Of The Hypothetical Company Sss. The financial performance measurement will be done using the ratio analysis. The balance sheet and the income statement of the company will be prepared using the data from the trial balance of the company. Additionally, the statement changes due to using IAS 1 like comprehensive income and position of the income statement will be critically analysed in this paper. The change in the ratios and the financial performance of Golfy and Tenniswise will be prepared in this study and the comparative analysis for investment decision for the investor will be recommended in this assignment.Final accounts of Sunny Soccer Sports for the year end 31^st October, 2013

Profit and Loss a/c of SSS as at 31st October, 2013
Income
Sales Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper		120000
cost of goods sold		40000
Gross income		80000
wages	17000
Heat	2000
Advertising	5000
postage	500
Rates	700
Petrol	2300
Total o/h		27500
Income from Rent		300
Net profit before tax		52800

Table 1: Profit and Loss a/c of SSS as at 31st October, 2013

Balance sheet of SSS as at 31st October, 2013
Current assets
Bank		22000
cash		500
Debtors		8000
closing stock	80000
Balance		80000
Rates
Total CA		110500
Current liabilities
Trade creditors	11000
Additional creditors	1200
Total CL		12200
Working capital		98300
Fixed assets
Premises	200000
Vehicles	25000
Total fixed Assets		225000
		323300
Capital		270500
Add: PAT		52800
Total equity		323300

Table 2: Balance sheet of SSS as at 31st October, 2013

The 1st standard of IAS provides the information of the general application of providing the financial statement according to the reporting style mentioned in IFRS. The objective of the international accounting standard is to provide information about the financial performance, financial position of the entity and cash flow of the firm. The report consists of statements of assets, liabilities, equity, income and expenses and cash flows mainly. Further, the statement also provides the information regarding the attributed profit to the shareholders on an annual basis (ey.com 2011). The IAS 1 has changed the reporting style of the accounts of an entity – balance sheet as ‘statement of financial position’ and income statement as ‘statement of comprehensive income’. The comprehensive income of the entity requires to be disclosed in a separate statement so that the surplus of the asset revaluation can be understood from the accounting statement. Additionally, the actuarial gains are also added in the comprehensive income statement. The gains or losses from foreign entity’s translation selling the firms’ assets and hedging of the commodities or foreign currency are reflected in this statement too (Iasplus.com 2016).

The financial position of the companies is expressed in the fair value of the assets and liabilities. The change in the balance sheet of the firms has been taken place lately where the changes in the financial position of the different attributes are observed except changes in the equity. Additionally, the current assets are presented in fair value of the market to present in a materialistic way (Ifrs.org 2016). The financial position of the firms must be classified into four parameters mainly – current and non- current liabilities ad assets. However, the current value of the equity and reserve of the firm is also disclosed here. Change in the shares, the portion of the shares in the subsidiaries are required for the companies to be disclosed in the statement of the financial position (Lole 2014).

There are many financial ratios present in the market under which we can measure the financial performance of a short-cut method. The method of ratio analysis provides the direction to the different stakeholders for analysing the performance of the firm in point of view of profitability, position of liquidity in the company as well as the efficiency of the management. According to McKeown et al. (2014), ratio analysis provides the analysts the understanding of financial performance as well as the financial position of the company on an accrual basis.

Balance sheet of SSS as at 31st October, 2013

Profitability ratios provide information about profit margin as well as the return to the investors. Gross profit and net profit margin provide the information regarding the profitability from the revenue of the business. However, the return on equity is the measurement of the return to the shareholders on the basis of their investment in the company. The capital is invested in the business and the return is the profit after tax for the firms (Nicholls 2013). The profitability margin shows good result due to the high value of the financial statements from time to time. The analysis can show that profit and return on the business due to change in different activities of the firm.

Gross profit margin = gross profit / sales

Net profit margin = Net profit / sales

ROCE = Net profit / capital employed in business

Liquidity ratio of the company can provide the information regarding the liquid present in the company’s balance sheet. The liquid assets are the backbone of the business to run the operation smoothly to get better performance from the daily activities of different aspects of the business. Further, measurement of the liquidity may show that the capacity of the firms to pay its obligations regarding the operations. The daily activities of the business always require the liquid assets and cash to run the operation without hazards (Parmar 2014). However, he saw that higher liquidity may reduce the efficiency of the funds as the cash may become idle due to lack of many actions in the business. In this context, the analysts prefer two tests mainly – current ratio and acid test ratio. The test of the liquid assets in the firm’s financial position may be judged using the current assets where the relative measurement of current assets is done with the current liabilities. However, the inventory is not much liquid as observed by many analysts (Ross 2012; Taillard 2013). Thereby, the change in the method is applied by deducting the inventory from the entire current assets and measure the current ratio of quick responding assets those can be liquidised fast.

Current ratio = current assets / current liabilities

Quick ratio = (current assets – inventory) / current liabilities

Management efficiency is very crucial to the performance of the firms as they are depended on the efficient decision-making ability of the management. It is clear that the management of the companies is responsible for delivering the better performance to the business from time to time. Therefore, the main concerned issue for the analysts is to measure the efficiency of the measurement (Velez-Pareja and Davila n.d.). However, the decisions made by the management of the firms could not be disclosed in public as it may reveal the strategy of the company in the outside world.   So, it is customary to measure the efficiency of the management by measuring their efficiency and effectiveness in managing the working capital of the business as well as the change in the payables and receivables position of the business (Vickerstaff and Johal 2014).

Statement on changes to reporting standards under IAS for profit statement and financial position

Inventory turnover ratio = Sales / Inventory

Days of collection = Receivables / (sales/365)

Days of payable = Payables / (sales /365)

Profitability measurement

 The profitability measurement of Golfy and Tenniswise was done here where the gross margin from the business observed. Golfy had almost half the gross margin of Tenniswise in the current period. However, the difference in net margin of the two companies reduced havoc as the operating cost of the former was low in the concerned period (Zaimah et al. 2013). The same picture was observed for measuring the return on equity whereas both the company yielded almost negligible difference to return the shareholders from the annual financial performance. Thereby, from the ROCE point of view, it can be said that Golfy had used the lesser capital to return more comparatively with Tenniswise. SSS had better profit margin as well as yielded better return to the shareholders in the current year.

Liquidity

Liquidity measurement of the two companies showed that Golfy had the better position of liquid assets in the company as it had better ratio compare to Tenniswise. In this context, the liquidity ratio of SSS was better than these two companies (McKeown et al. 2014).

Efficiency

The efficiency ratio of the companies showed that Golfy’s management was more efficient in collecting the debt and managing the creditors. However, the payment days of the creditors for Golfy was lower than Tenniswise; the creditor management was better for the first company. However, the inventory turnover ratio of Golfy was poor compared to Tenniswise as seen in the calculation. Thereby, it can be said that the later one has performed well in turning over the inventory into sales faster than the former one (Hillier 2013). Comparing with SSS, the working capital management of Golfy and Tenniswise was poor.

Conclusion

In power point The efficiency ratio of the companies showed that Golfy’s management was more efficient in collecting the debt and managing the creditors. However, the payment days of the creditors for Golfy was lower than Tenniswise; the creditor management was better for the first company. 

References

Ahmed, A. (n.d.). Financial Ratio Analysis of Square Pharmaceuticals Limited. SSRN Electronic Journal.

Berk, J., DeMarzo, P. and Harford, J. (2012). Fundamentals of corporate finance. Boston: Prentice Hall.

Beyersdorff, M. (2014). International GAAP 2014. Chichester, UK: J. Wiley & Sons.

Beyersdorff, M. (n.d.). International GAAP 2014.

Brealey, R., Myers, S. and Marcus, A. (2012). Fundamentals of corporate finance. New York: McGraw-Hill/Irwin.

Collings, S. (n.d.). Corporate finance for dummies.

Dr.Vani R Kamath, D. (2013). Ratio as a tool of financial analysis for Indian Retail sector companies.IOSR Journal of Business and Management, 10(5), pp.32-34.

ey.com, (2011). Changes to the presentation of other comprehensive income — amendments to IAS 1. [online] Available at: https://www.ey.com/Publication/vwLUAssets/IFRS_Developments_Issue_7/$FILE/IFRS_Developments_Issue_7_GL_IFRS.pdf [Accessed 9 Feb. 2016].

Hillier, D. (2013). Corporate finance. London [u.a.]: McGraw-Hill.

Iasplus.com, (2016). Revised IAS 1 requires statement of comprehensive income. [online] Available at: https://www.iasplus.com/en/news/2007/September/news3764 [Accessed 9 Feb. 2016].

Ifrs.org, (2016). Illustrative examples – Statement of financial position, statement of comprehensive income, and statement of changes in equity. [online] Available at: https://www.ifrs.org/XBRL/Resources/Documents/Illustrative%20Examples%202013/ixbrl_example2_2013-03-28.xhtml [Accessed 9 Feb. 2016].

Lole, J. (2014). Accounting standards. Kingston upon Thames: Wolters Kluwer [for] the Institute of Chartered Accountants in England and Wales.

McKeown, W., Kerry, M., Olynyk, M. and Beal, D. (2014). Financial Planning. Milton: Wiley.

Nicholls, C. (2013). Corporate finance and Canadian law. Toronto, Ont.: Carswell.

Parmar, V. (2014). Analysis Of Financial Statements. Saarbrücken: LAP LAMBERT Academic Publishing.

Ross, S. (2012). Fundamentals of corporate finance. New York: McGraw-Hill.

Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: John Wiley & Sons, Inc.

Velez-Pareja, I. and Davila, M. (n.d.). Financial Analysis and Control – Financial Ratio Analysis (In Spanish). SSRN Electronic Journal.

Vickerstaff, B. and Johal, P. (2014). Financial Accounting. Hoboken: Taylor and Francis.

Zaimah, R., Masud, J., Haron, S., Othman, M., Awang, A. and Sarmila, M. (2013). Financial Well-Being: Financial Ratio Analysis of Married Public Sector Workers in Malaysia. Asian Social Science, 9(14).