Objectives and Limitations of Analysis of Financial statements

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UNIT STANDARD 11624 [V6] Demonstrate and apply knowledge of financial analysis

Performance Description Range

Criteria

Element 1

Explain the objectives and limitations of analysis of financial statements.

1.1 The explanation identifies three users of financial and accounting statements and describes their objectives for financial analysis.

1.2 The explanation identifies three

limitations of financial analysis in terms of the process and the results of financial analysis.

Element 2

Calculate ratios to measure profitability, asset utilisation, working capital management, long-term financial stability, and financial markets.

ratios – three ratios for profitability, two ratios for asset utilisation, two ratios for working capital management, two ratios for long-term financial stability, two ratios for financial markets.

2.1

The selected ratios and amounts are fit for purpose.

2.2

The calculations are correct and expressed in correct units.

Element 3

Report to management on the results of financial analysis.

3.1

The report is in a format appropriate for management.

3.2

The report compares and interprets ratios calculated for at least two accounting periods.

ratios – profitability, asset utilisation, working capital management, long-term financial stability, solvency.

3.3

The report includes comparison with another business or industry benchmark.

3.4

The report makes recommendations.

3.5

Variations in the report content for a different end user are explained.

end users must include one of – banker,

investor, creditor, employee.

Element 4

Demonstrate and apply knowledge of the solvency test.

4.1 Solvency test is explained in

accordance with the Companies Act 1993 and its subsequent amendments.

4.2 Amounts are selected and applied in accordance with the solvency test, and a conclusion is drawn.

UNIT STANDARD 9685 [V6] Write an analytical report

LO

Description

Range

ER1

Plan the analytical report.

1.1

The purpose, audience and scope of the report are determined and documented.

1.2

Information is selected, analysed, and organised into a structure that fits the purpose of the report.

ER2

Write the analytical report.

2.1

Report is consistent with the purpose and organisational requirements.

Range – report may

include but is not limited to – executive summary, abstract, terms of reference, introduction, discussion, findings, conclusions, recommendations, glossary, references, appendices; evidence of at least five is required.

2.2

The language throughout the report is appropriate for the audience.

Range – language includes – spelling, punctuation, tone, vocabulary, grammar, syntax.

2.3

Findings are presented in a format that matches the data and the audience.

Range – presentation may include but is not limited to – tables, graphs, text, diagrams.

2.4

Report is written without bias.

2.5

Conclusions and/or inferences drawn are consistent with findings.

2.6

Any recommendations made are consistent with the purpose, scope, findings, and conclusions.

2.7

Report format is in accordance with the purpose and organisational requirements.

ER3 Evaluate the effectiveness of the analytical report.

3.1 Audience feedback on the report is sought and

used to identify any possible refinements for future reports.

REPORT PART A: SUMMARY CHART RATIO AND PERCENTAGE CALCULATIONS

BACKGROUND

Briscoe Construction (BC) owns 3 large factories in New Zealand and a number of building companies. It utilises a variety of construction techniques and is recognised as a specialist in its areas of expertise, all elements of construction.

During the last year BC has had decreasing cash flow and an increasing loss. They have identified that a good idea would be to sell off one of its building companies so they can strengthen their overall brand and financial stability.

Two building companies that are potentially for sale are:

  1. Alpine Constructions Ltd.
  2. Maple Builders Ltd.

Alpine Constructions Ltd. is based in Masterton while Maple Builders Ltd. is based in Christchurch.

BC has been able to supply the following information about these companies. They would like you to analyse the financial information supplied and complete the attached summary chart. Later in Part B you will be required to write a report for them.

ASSIGNMENT REQUIREMENTS

You are required to prepare the following information and reports.

Ratio and Percentage Calculations

  1. Calculate appropriate ratios and percentages for both companies.
  2. Write your answers on the attached sheets.
  3. Your answers need to be typed into the Word document “Assignment Ratio and Percentage Calculation Forms” which has been emailed to you (you may use an appropriately formatted Excel file if you wish).
  4. Part A satisfies Unit 11624 PC’s 2.1, 2.2
  5. This assignments is to be submitted electronically via www.abacusinstitute.ac.nz/moodle by 5 PM on the due date as above

OR

Alternative arrangements can be made for presenting and submitting your work with help of the course instructor/tutor, in case of any special needs.

Alpine Constructions Ltd.

Income Statements

Year ending 2011Year ending 2012

Sales

Cash Sales $160,000$190,000 Credit Sales $1,550,000$1,765,000

less COGS

Opening Inventory$97,000$117,000

Direct labour$250,000$500,000

Purchases$220,000$320,000 Import Duties$15,000$45,000

Freight in$22,000$28,000

$604,000$1,010,000

less Closing Inventory$130,000$140,000

Actual COGS Gross Profit

add Other Operating Revenue

Dividends from Plumbers Direct$10,000$12,000

Interest received$5,000$7,000

$15,000$19,000

Total Gross Profit

Less Operating Expenses

Selling and Distribution

Advertising $90,000$105,000 Freight out $70,000$80,000

Sales wages$150,000$165,000

$310,000$350,000

General and Administrative

Rent$130,000$145,000

Office wages$55,000$60,000

Directors fees$50,000$55,000

General Wages$80,000$95,000

Depreciation on equip $10,000$8,000

Power$15,000$18,000

$340,000$381,000

Finance

Interest on Overdraft$3,500$6,500 Interest on 20 year loan$50,000$47,000

Bad debts$7,500$10,000

$61,000$63,500

Total Operating Exp.

Net Profit (T.G.P. – O.E.) less Income Tax Net Profit After Tax less Dividends Paid

Retained Earnings

Maple Builders Ltd.

Income Statements

Year ending 2011Year ending 2012

Sales

Cash Sales$80,000$110,000

Credit Sales$1,215,000$1,150,000

less COGS

Opening Inventory $65,000$98,000 Direct labour $200,000$285,000

Purchases$180,000$210,000 Import Duties$12,500$18,900

Freight in$22,000$29,100

$479,500$641,000

less Closing Inventory$98,000$140,000

Actual COGS Gross Profit

add Other Operating Revenue

Dividends from Pumpkin Ltd.$7,800$6,500

Interest received$3,500$3,200

$11,300$9,700

Total Gross Profit

Less Operating Expenses

Selling and Distribution

Advertising$48,500$44,500

Freight out$36,000$28,000

Sales wages$85,000$85,000

$169,500$157,500

General and Administrative

Rent$55,000$57,000

Office wages$25,000$29,000

Directors fees$45,000$45,000

General Wages$65,000$75,000

Depreciation on equip $7,500$6,500

Power$11,000$15,000

$208,500$227,500

Finance

Interest on Overdraft$6,500$7,000 Interest on 20 year loan$25,000$25,000

Bad debts$8,000$10,000

$39,500$42,000

Total Operating Exp.

Net Profit (T.G.P. – O.E.) less Income Tax Net Profit After Tax less Dividends Paid

Retained Earnings

Maple Builders Ltd.

Balance Sheet

For the Period Ending December 31

20112012

Assets

Current Assets

Cash and Cash Equivalents

Short Term Investments

Accounts Receivable Inventory

Prepaid Expenses

<Other Current Asset>

Total Current Assets

Fixed Assets

Land

Equipment and Machinery

Accumulated Depreciation - Equipment

<Other Fixed Asset>

Total Fixed Assets

$135,000

$130,000 $36,500

$98,000

$12,000

$0

$26,500

$128,000

$50,000

$140,000

$12,500

$0

$411,500

$280,000

$125,000

($5,500)

$0

$357,000

$280,000

$240,000

($21,500)

$0

$399,500

$498,500

Total Assets

$811,000

$855,500

Liabilities & Equity

Current Liabilities

Short Term Loans Payable

Accounts Payable

Accrued Liabilities

Overdraft

<Other Current Liability>

Total Current Liabilities

Long Term Liabilities

Long Term Debts

Deferred Credits and Other Liabilities

Deferred Income Taxes

Total Long Term Liabilities

Total Liabilities Equity

Issued and Paid-Up Capital (100,000 shares @ 1.50)

Retained Earnings

Total Equity

$45,000

$22,000

$21,000

$8,000 $0

$68,500

$45,000

$20,000

$16,500

$0

$96,000

$190,000 $89,000

$21,000

$150,000

$226,000

$115,000 $26,500

$300,000

$367,500

$396,000

$150,000

$517,500

$150,000

$265,000

$188,000

$415,000

$338,000

Total Liabilities & Equity

$811,000

$855,500

Part A: Summary Chart Ratio and Percentage Calculations

Alpine Construction Ltd.

Maple Builders Ltd.

2011

2012

2011

2012

Solvency Ratios

Profitability Ratios

Asset Utilization Ratio

Financial Market Ratio

Long Term Financial Ratio

Working Capital Ratios

Market indicators for the Building Industry:

Measure

Industry standard

Gross Profit %

60%

Net Profit %

20%

Rate of Return on Assets

33%

COGS

30%

Current Ratio

2:1

Equity Ratio

60:40

Inventory Turnover

6.2 times

Accounts Receivable (days)

43 days

EPS

$1.28

PE

3.30

REPORT PART B: REPORT ON PROFIT, STABILITY AND EFFICIENCY

BACKGROUND

Briscoe Construction (BC) has been able to obtain information about these companies. They would like you to prepare a report that includes advice to them on (report section numbers provided):

Note: Your report should be structured in a format detailed on the next page, and your analysis/findings/discussion section must cover the following:

  • Which subsidiary provides the best long term profit potential (PROFITABILITY);

(11624 PCs 2.1, 2.2, 9685 ERs 1.1, 1.2, 2.3)

  • Which subsidiary is in the most financially stable position (FINANCIAL STABILITY AND WORKING CAPITAL MANAGEMENT);

(11624 PCs 2.1, 2.2, 9685 ERs 1.1, 1.2, 2.3)

  • Which subsidiary is run most efficiently (ASSET UTILISATION)?

(11624 PCs 2.1, 2.2, 9685 ERs 1.1, 1.2, 2.3)

  • Which subsidiary is in the best market position (FINANCIAL MARKETS)?

(11624 ERs 2.1, 2.2, 9865 ERs 1.1, 1.2, 2.3)

  • Which subsidiary is the most solvent? (SOLVENCY)?

(11624 PCs 2.1, 2.2, 4.1, 4.2, 9685 ERs 1.1, 1.2, 2.3)

  • Which subsidiary compares most favourably within the industry (INDUSTRY)?

(11624 PCs 2.1, 2.2, 3.3, 9685 ERs 1.1, 1.2, 2.3)

  • State which company BC should divest. You must provide reasons for your recommendation. (Note divest the best overall performing organisation)

(11624 PC 3.4, 9685 ERs ERs 1.1, 1.2, 2.3, 2.5, 2.6)

ï‚· Detail any improvements to be made or actions taken after the divesting of the subsidiary (ie: to the remaining subsidiary that you don’t sell).

(11624 PC 3.4, 9685 ERs 1.1, 1.2, 2.3, 2.5, 2.6)

  • State at least three (3) limitations and variations that might exist to your analysis. These must be specific to the end user. Also comment must be included as to how the report would vary if presented to a bank.

(11624 PCs 1.2, 3.5)

  • Seek audience feedback on your report (refer Student Feedback Report), and using this feedback identify any possible refinements for future reports.

(9685 ER 3.1)

Report Structure and content (10-15 pages approximately, 1500-2500 words approximately)

Executive Summary (1 page, 300 words) (to summarise the entire report including Introduction (purpose), Methodology, Results, and Recommendation)

1.0 Introduction: (1 page)

The introduction should contain the following:

  • State the background (purpose) to this report,
  • Overview the financial analysis concepts used in preparing this report,
  • Identify the requirements of potential users (scope) of this report (minimum of 3 identified) and;
  • Overview the contents of this report

2.0 Analysis/Findings (5-7 pages)

Analysis: What do the results tell us?

Findings: What did you find? Tell the reader using formats such as graphs tables etc

Example for a section: Profitability, Asset Utilisation etc

PROFITABILITY: Justify your answer to the question “Which company provides the best long term profit potential?” You must directly and specifically answer the question, giving reasons for your answer. In justifying your answer to the question, use the ratios and percentages calculated as the evidence for (and to help identify) any issues.

3.0 Discussion: (2-3 pages)

Based on your analysis/findings above, discuss the financial health/position of each company.

4.0 Conclusion: (1 page)

Should draw on your analysis/findings above.

5.0 Recommendations: (1/2 page)

Based on your analysis above, make a recommendation on which company BC Limited should divest. First you must explain the reasons for making this recommendation. You must divest the strongest performing business. Note: In this report your recommendation and conclusion are effectively combined

6.0 Recommended Improvements: (1/2 – 1 page)

Suggest three ways of improving the business you have recommended for not divesting. These suggestions should be practical, specific and explained in reasonable detail. Each suggestion must be distinctly different from the others. They must not all relate to the same issue or aspect of the business.

7.0 Limitations: (1/2 page)

Suggest possible limitations of the financial analysis including: form and content, accounting measurement, classification, materiality, consistency, comparability, and neutrality.

8.0 Reference List: (if used)

9.0 Appendices: Any additional information that needs to be supplied to the reader. (not included in word limit)

(11624 PC 1.1, 9865 ERs 1.1, 1.2, 2.1, 2.5, 2.6, 2.7)

10.0 The report must also:

  • Be conducted over two accounting periods (11624 PC 3.2)
  • Be conducted for both entities as potential parts of BC’s business operations under the headings provided (11624 PC 3.2)
  • Have clearly determined and documented purpose, audience and scope (9685 ER 1.1)
  • Have information that is selected, analysed and organised into a structured that fits the purpose of the report, be consistent with organisational requirements and audience, and be written without any bias (9685 ERs 1.2, 2.1, 2.4, 2.7)
  • Be written throughout in language (inc. spelling, punctuation, tone, vocabulary, grammar and syntax) such that it is appropriate for the audience (9685 ER 2.2)
  • Present findings in a format (e.g., tables, graphs, text, diagrams, other) such that your presentation/interpretation matches the data and the audience (9685 ER 2.3)
  • Ensure that conclusions and/or inferences you have drawn from analysis are consistent with findings (9685 ER 2.5)
  • Propose recommendations in a manner that these are consistent with the purpose, scope, findings and conclusions (9685 ER 2.6)
  • Demonstrate that audience feedback has been sought by you and used to identify any possible refinements for future reports (9685 ER 3.1)

They have set aside the Board meeting in late May to discuss this, so I need your report completed and delivered to them by the due dates as outlined. This will give me time to send it to all Directors for their consideration. BC’s Board of Directors will make the final decision as to which company to divest, but the decision will rely heavily on your report.

STUDENT FEEDBACK REPORT

STUDENT NAME: ______________________________

UNIT STANDARD 11624 [V6] Demonstrate and apply knowledge of financial analysis

Performance

Criteria

Comment

Achieved

Not Achieved

1.1

1.2

2.1

2.2

3.1

3.2

3.3

3.4

3.5

4.1

4.2

5.1

5.2

5.3

5.4

5.1

STUDENT FEEDBACK REPORT

STUDENT NAME: ______________________________

UNIT STANDARD 9685 [V6] Write an analytical report

ER

Comment

Achieved

Not Achieved

1.1

1.2

2.1

2.2

2.3

2.4

2.5

2.6

2.7

3.1

(9685 ER 3.1)

National Diploma in Business Level 5 1 Assignment Parts A & B, Accounting & Fin Man 2014

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