Assignment 1: Discussion—Case Study: General Machinery, Ltd
Ratio analysis is a method used to analyze the financial reports of a company and interpret trends in the company’s performance. As a nonaccounting manager, you use numerous ratios to analyze your company’s performance year-by-year and benchmark the performance to industry averages, to an individual competitor’s performance, or against a predetermined target.
For this assignment, read “Case study question 7.2: General Machinery Ltd” on page 168 in chapter 7 of our textbook, Accounting for Managers: Interpreting Accounting Information for Decision Making. Using the data from the case study, repond to the tasks below.
Consider the following scenario for this assignment: You are an external investor who is considering General Machinery as one of the potential companies for investment. Respond to the following in your initial discussion post:
- Discuss the major issues facing the company.
- Recommend what actions the company should take to improve its overall performance, addressing each of profitability, liquidity, gearing, activity, and shareholder return measures.
- In what way does the Statement of Cash Flows help you to interpret the ratios and financial performance of the company?
- What information does ratio analysis provide for meeting the requirements of the case questions?
- Which ratios are the most important, and which ones are of limited value? Justify your choices for the scenario.
- Why do you need to compare:
- The current year ratios with the prior year ratios?
- The ratios of competitors in the same industry or some other benchmark?
Other than the computations used in ratio analysis, what else is necessary to properly analyze a company for investment?
Assigned questions for Module 2 are:
Q6-1: What are accounting standards? Q6-2: Summarize the IASB’s Framework for the Preparation and Presentation of Financial Statements. Q6-3: A business has the following balances in its financial records: Income tax £30,000; Selling & administration expenses £80,000; Revenue £350,000; Interest expenses £15,000; Cost of Sales £190,000. How much is the Gross profit, Operating profit, and the Net Profit after tax?Q6-4: What are some ways you can express the accounting equation?Q6-5: The following items appear in a Statement of Financial Position: Receivables €200,000; Payables €350,000; Inventory €100,000; Non-current assets €750,000; Long-term loan €400,000. What is the balance of Shareholders’ funds (SH Equity)?Q6-6: ABC buys a smaller company XYZ for a negotiated price of £1 million. XYZ’s assets are valued at £750,000. Assuming goodwill is amortized over 5 years, what is the value of goodwill in ABC’s Statement of Financial Position at the end of the third year after acquisition?Q6-7: What is Agency theory and what is it primarily concerned with?Q7-1: What is the difference between ROI and ROCE ratios?Q7-2: Use the following information extracted from ABC’s Income Statement and Balance sheet to determine ABC’s Days Sales Outstanding, Inventory Turn, and Payables Days Outstanding:Sales £4,200,000; Gross profit £2,700,000; Receivables £630,000; Payables £275,000; Inventory £300,000. ABC calculates its financial ratios based on being open for business 6 days per week for 50 weeks per year.Q7-3: A company has capital employed of €1,000,000 and generates a profit after tax of €300,000. Assume the company has a balance sheet with 60% debt. What is the ROI? Now assume the company has a balance sheet with 40% debt. What is the ROI? Q7-4: A business has current assets of $35,000 and current liabilities of $20,000. It collects its receivables more quickly and uses $10,000 of its cash at bank to repay a long-term debt. What is the effect on the working capital ratio after the long-term debt is repaid? Q8-1: How is inventory valued in the Balance Sheet (Statement of Financial Position)? Q8-2: In a manufacturing business, when the company has completed production on inventory it wishes to sale, explain flow of costs for affected inventory accounts. Q8-3: A business purchases inventory stock on four separate occasions. Purchased 3,500 units at a total cost of €8,050; Purchased 3,000 units at a total cost of €7,110; Purchased 4,000 units at a total cost of €9,600; and Sold 5,995 units at a total price of €24,760. Each purchase was completed in the order provided within the same period. Match the inventory method with the correct cost of sales and the correct value of inventory.