Return on equity= net income/ shareholders’ equity
20×4
Return on equity = 20,000/150,000
=0.13 or 13%
20×5
Return on equity = 11,000/ 144,000
=0.076 or 7.6%
20×6
Return on equity = 2,500/ 143,000
=0.017 or 1.7%
Return on asset = net assets/ average total assets
Average total assets = (previous year total assets + current year total assets)/ 2
20×4
Return on asset = 150,000/266,000
Return on asset ratio = 0.56 or 56%
20×5
Return on asset = 144,000/274,000
Return on asset ratio = 0.53 or 53%
20×6
Return on asset =143,000/284,000
Return on asset ratio = 0.5 or 50%
Locking at the two ratios, return on equity and return on asset ratio, they have a positive correlation. Within the three accounting period, the return on equity and the return on asset ratio have progressively decreased. In the financial year 20×4, the return on equity ratio was 13% while that of return on asset ratio was 56% similarly by the end of the financial year 20×6 the return on asset ratio was 1.7% while the return on assets was 50%. This means that any shift on the rate of return is directly reflected by these ratios.
Gross profit margin = 100 %( revenues less cost of goods)/ revenues
20×4
Gross profit margin = 100 %( 200,000 – 131,000)/200, 000
Gross profit margin = 35%
20×5
Gross profit margin = 100% (180,000- 87,000)/180,000
Gross profit margin = 52%
20×6
Gross profit margin = 100% (165,000- 80,000)/165,000
Gross profit margin = 52%
Net profit margin = (net income/ net sales) 100%
20×4
Net profit margin = (20,000/200,000) 100%
Net profit margin = 20%
20×5
Net profit margin = (11,000/180,000) 100%
Net profit margin = 6.1%
20×6
Net profit margin = (2,500/165,000) 100%
Net profit margin = 1.52%
Return on sales
Return on sales =operating profit/ net sales
20×4
Return on sales = 35,000/200,000
Return on sales = 0.18 or 18%
20×5
Return on sales = 20,000/180,000
Return on sales = 0.11 or 11%
20×6
Return on sales = 6,000/165,000
Return on sales = 0.04 or 4%
The three ratios calculated above have a common factor, which is the sale value. However, the gross profit margin seems to be increasing with time, as the other two ratios, net profit margin and return on sales seem to be decreasing. Gross profit in the financial year 20×14 was at 35% and increased to 52% in the financial year 20×5 and 20×6. The net profit margin ratio and the return on sales were at 20% and 18% respectively at the end of the financial year 20×4 and reduced to 1.52% and 4% by the end of the financial year 20×6.
Short-term solvency ratio
The above ratios have not been computed due to lack of important figures that are to be completed. The balance sheet has left out the declaration of current assets, which is crucial for the calculation of both ratios.
Inventory turnover ratio = cost of goods sold/ average inventory
20×4
Inventory turnover = 69,000/ ((41,000+90,000)/2)
Inventory turnover = 0.8
20×5
Inventory turnover = 52,000/ ((44,000+84,000)/2)
Inventory turnover = 0.6
20×6
Inventory turnover = 41,000/ ((49,000+75,000)/2)
Inventory turnover = 0.7
Inventory turnover in days
Inventory turnover in days = 365/inventory turnover ratio
20×4
Inventory turnover in days = 365/0.8
Inventory turnover days = 465days
20×5
Inventory turnover in days = 365/0.6
Inventory turnover in days = 608 days
20×6
Inventory turnover in days = 365/0.7
Inventory turnover in days = 521days
Looking at the stock turnover ratio there is a lot of stagnation in stock movement as it is below 1. Also the inventory turnover in days in the three financial years, shows that the stock takes longer than a year to be finished.
Accounts receivable turnover ratio= net credit sales/ average accounts receivable
Average day’s sales uncollected
The above-mentioned calculations could not be computed since the balance is incomplete. Incomplete balance sheet lacks current assets(Larson, & Kermit, 2015).
I recommend that the company seek consultation on how to implement international accounting standards, which require that current assets and non-current assets be realized on the balance sheet. Another thing is that the company should seek the services of an external auditor who will ensure that the policy standards are observed and that the financial records are recorded by the policy framework (Romney & Steinbart, 2013).
Despite recommending that the firm seeks the services of an auditor and consult on how to adopt the international accounting standards, some challenges hinder the implementation of the recommendation. The first challenge is that the staff is working at the firm currently are not conversant with these standards and therefore require replacement of training for the policy to work. Another challenge is that the firm might be lacking enough funds to implement the recommended changes.
With the implementation of the recommendation, the inefficiencies notice on the stock as well as the decreasing return will be addressed. Moreover, lack of records that show the amount of account receivable will be a thing of the past and will help the company determine the amount receivable in their assets. Finally, investors will be able to interpret the firm’s financial information easily (Bodnar & Hopwood, 2014).
The stakeholders of Allandale Limited include suppliers, customers, the bank, the staff and the investors
Allandale Limited took out a mortgage of $ 20 million for expansion of its building facilities due to increased demand from customers. The major bank that granted the loan on condition that the loan will not be repayable if the company maintains its current ratio above 2:1 and the return on assets at above 10% after tax. The current situation shows that the above requirement has been met whereby the current ratio is at 2.1:1 and the return on the asset after tax are at 11%. However, the real situation is that the figures have been exaggerated and the actual figure has yet to meet the target. The real figure shows an overvalued boat which when assigned its actual value will bring the current ratio to 1.6:1 and 2% return on assets after tax. The real figures would prompt for immediate repayment of the 20 million. The result would lead to a declaration of the company bankruptcy and loss of jobs. (Sinclair, Romney & Horngren, 2014)
Accounting standards require that asset valuation is done after the asset has been depreciated and no overvaluation of the asset to increase the company value.
The standards also require that external funding should not exceed 60% of the company’s equity thus to ensure the company’s shareholders retain ownership.
Finally, the repayment of $ 20 million should be made in installments not at once.
Tom should convince Lyson to share the information on how the state of the actual ratios since it might be that the accountant has more to share than Tom thinks. Meanwhile, he should strategize on collecting the debts from customers and attempt to recover bad debts. Also, the accountant should revisit the accounting standards to ensure that some mistakes such as overvaluation do not happen (Livingstone, Kerrigan & Heckert, 2015).
A good and honest accountant would observe transparency in his/her activities. Convincing Lyson to explain the actual state of the company might be difficult, as he would not like to seem incompetent. An alternative would be to outsource the services of an auditor. However, the auditor will be required to disclose the irregularities even to the stakeholders, and this could lead to the company being declared bankrupt (Gelinas, Dull, Wheeler & Hill, 2013).
Bad debt collection might work and recover part of the money require maintaining the ration, but it is not a guaranteed move, as some debtors might already have been declared bankrupt by law. However, renovating the boat and selling it at the even much higher price would fetch the finances required.
Making it a requirement for the accountant to observe the accounting standards principles is a promising move, as it will prevent unethical behavior in accounting records since the superiors have the advantage of firing accountants who fail to observe the standards (Heckert, 2013).
The giggling brothers should invest in an integrated accounting system. An integrated accounting system is a customized application that runs on a computer’s operating system and performs tasks such as disseminating financial information and recording transactions.The system includes a management accounting system, inventory accounting system and basic business transaction and business processes. The system will help in processing data timely and accurately thereby streamlining information output and input. This system serves as a one-stop shop where the business owner can access accounting information such as cash flow accounting, managerial and financial (Kimsley, 2012).
Benefits of the integrated accounting system the maintenance of a single set of accounts with a single profit figure hence, there is no need for reconciliation statement.
The system ensures time-saving as it avoids duplication of activities. The saved time is used elsewhere productive.
With suchas system information delay from the accounting, records will be history as the system provides real-time and accurate figures for financial and costing purposes.
The computerized system works to ensure efficiency thus saving a lot of money since it requires minimal supervision and thus few numbers of staff (Essers, 2015).
The system provides a central point of information for the business, which will save the giggling brothers time and expenses to access, and better control of operations due to its simplicity.
The system has the capability of furnishing information on the cost of each product and operation as well as highlights the variances as the highlighted from the original books of entry thus giving more control.
The integrated accounting system will also help the giggling brothers to access information on profit and loss of on the business and give better control of the operations (Bank, 2013).
Currently, the giggling brother is facing severe cash flow problems such as the excessive purchase of special price stock, inappropriate timing of stock purchase to sales, misunderstood market drives and inadequate control on market drives. All these factors are leading to business inefficiencies hence the fact that the profit made for half a year is recovered by the remaining six months. With an integrated accounting system, not only will these issues be wiped off but also more benefits will come along. The giggling brothers will be able to downsize on the number of staff thus saving cost; the loss realized after every six months will be turned around into profits while timely information regarded inventory turnover, as well as market information, will be provided timely almost in real-time. However, their huge initial cost associated with installing the system, which at times may be a challenge. However, the Giggling brothers should consider that the onetime cost will be recovered shortly and such a system will serve for decades as well (John, 2012).
The Giggling brothers ought to view the implementation of the system as a long-term investment rather as a cost since the system is meant to curb losses in cash flow, provide signals on when the stock needs to be replenished as well as keep records.
First, the Giggling brothers should be aware that the integrated system is a computerized system. Therefore, the brothers should discuss the implementation of the integrated accounting system with the investors, senior, managers, as well as an accounting system specialist to guide the panel on the type of system that would be appropriate for such a business. The specialist should assess the nature of the business and give recommendations on how the suitable system might be structured. From there the Giggling brothers should outsource a computer programmer who has specialized on integrated accounting software. The programmer will help develop a customized software that meets business needs as well as provides continued survives regarding monitoring evaluation and repair services. Also due to the dynamic nature of technology, whenever there is a new function or application in the market that helps improve the performance of the existing integrated system thus increasing business efficiency, the service provider will be ready to update the system (Hitchner, Hyden & Mard, 2013).
In every setup that involves repetitive activities that aim to achieve a given goal, the monitoring and evaluation activities are inevitable. The examination and evaluation approach used to assess competitors might be very helpful in providing feedback on the business operations and position as well as highlight areas, which the business has, a stronghold. These evaluation activities will be twice as effective as those from the competitor’s side will, since the business will be running on an integrated accounting system, which gives the business a competitive edge as well as timely feedback. Moreover, the evaluation measure will help to monitor and evaluate the implementation of the integrated accounting system (Britton & Waterston, 2013).
Also, the effort to evaluate the competitors in the market will help the Giggling brothers determine their market share and make strategies necessary to expand their share using the information generated by the integrated accounting system. This will not only increase the market share but will help increase revenue thereby recovering funds lost in the previous years (Catherine, 2013).
Competitor evaluation will also help the Giggling brothers business to identify the various products that the client are lacking. This will provide a competitive edge and high returns, as they will be the only business supplying the product. Also, the assessment is necessary to strategize on the pricing of their product to outdo the competing business
References
Alex, K. (2012). Statements of financial accounting concepts. New York: Wiley.
Anil Kumar, S., Kumar, V., & Mariyappa, B. (2010). Corporate accounting. Mumbai [India]: Himalaya Pub. House.
Bank, W. (2013). Income and Asset Disclosure. Washington: World Bank Publications.
Bodnar, G., & Hopwood, W. (2014). Accounting information systems. Harlow, Essex: Pearson Education Limited.
Britton, A., & Waterston, C. (2013). Financial accounting. Harlow: Financial Times Prentice Hall.
Catherine. (2013). System of national accounts 1993 (SNA). Brussels: Commission of the European Communities.
Essers, P. (2015). The influence of IAS/IFRS on the CCCTB, tax accounting, disclosure and corporate law accounting concepts. Austin: Wolters Kluwer Law & Business.
Gelinas, U., Dull, R., Wheeler, P., & Hill, M. (2013). Accounting information systems.
Heckert, J. (2013). Accounting systems.
Hitchner, J., Hyden, S., & Mard, M. (2013). Valuation for financial reporting. Hoboken, N.J.: Wiley.
Huppi, M., & Huppi, M. (2016). Annual Review of Development Effectiveness 2006. Washington, D.C.: The World Bank.
John. (2012). Public office, private interests. Washington, D.C.: World Bank.
Kimsley, J. (2012). Internal control and accounting systems (p. 3). London: London publishers.
Larson. Kermit D. (2015). Fundamental Accounting Principles (S.I.L.S.) Vol. II (Chpts 14-28). Boston, MA: Homewood. IL.
Livingstone, J., Kerrigan, H., & Heckert, J. (2015). Modern accounting systems. New York: Ronald Press Co.
Mary, S. (1977). The structure of establishing financial accounting standards. Stamford, Conn.: Financial Accounting Foundation.
Phillips, F., Libby, R., & Libby, P. (2016). Fundamentals of financial accounting. New York, N.Y.: McGraw-Hill Education.s
Romney, M., & Steinbart, P. (2013). Accounting information systems.
Sims, M., & Clift, R. (2013). Australian corporate accounting. Roseville, N.S.W.: McGraw-Hill.
Sinclair, R., Romney, M., & Horngren, C. (2014). Accounting systems.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download