Financial Performance Of Travis Perkins Plc Accounting Essay

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The company's financial statements will be concerned with the entity's performance over a period of time and how that performance compares or is benchmarked against that attained by competitors over the same period. The basis for these judgments and comparisons will be achieved by employing accounting ratio analysis. Calculating financial accounting ratios involves interpretation and analysis of the financial statements by arranging, examining and comparing the results in order that users may make their decisions.

Ratio analysis:

Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. A financial ratio can give a financial analyst an excellent picture of a company's situation and an analysis of the financial ratios over a period of time would provide information about the changes in the company's performance.

Calculation:

For the year 2008:

Profitability ratios:

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Return on capital employed (without Exceptional Items)

= Net Profit before tax and interest * 100/ Capital Employed

= 202.5*100/2243.7 = 9.025

Return on capital employed (Exceptional Items)

= Net Profit before tax and interest * 100/ Capital Employed

= 146.3*100/2243.7 = 6.52

Return on assets (without Exceptional Items)

= Profit before tax and interest *100/Total Assets

= 202.5*100/2891.4 = 7.003

Return on assets (without Exceptional Items)

= Profit before tax and interest *100/Total Assets

= 146.3*100/2891.4 = 5.06

Asset Turnover

= Revenue * 100/Assets

= 3178.6*100/2891.4 = 109.9

Gross Profit

= Gross Profit * 100/Revenue

= 1098.3*100/3178.6 = 34.6

Net Profit

= Net profit before interest and tax * 100/Revenue

= 202.5*100/3178.6 = 6.37

Efficiency ratios:

Debtors collection period

= Trade receivables * 365/Revenues or Sales

= 386.2*365/3178.6 = 44.3 Days

Creditors' period

= Trade payables x 365 /Cost of Sales or Purchases

= 582.2*365/2080.3 = 102.2 days

Inventories Turnover

= Average or Closing inventories*365/Cost of sales or Revenues

= 321.9*365/2080.3 = 56.5 days

Liquidity ratios:

Current ratio or Working Capital

= Current assets/Current liabilities

= 718.2/647.7 = 1.1

Quick or Acid Test ratio

= Current assets -inventories/Current liabilities

= (718.2-321.9)/647.7 = 0.6

Gearing / solvency ratio:

Gearing

= Fixed Interest Capital* 100/Capital employed

= 10073.3*100/2243.7 = 44.9

The same calculations were followed for the year 2007 and resulted in the following table.

Performance of analysis:

The following table describes the summary of the performance analysis of the company for two financial years 2007 & 2008

SL.NO

Analysis

The group

For year 2008 without Exceptional Items

For year 2008 with Exceptional Items

For year 2007 without Exceptional Items

For year 2007 with Exceptional Items

1

Profitability

Return on capital employed

9.025

6.52

11.65

11.65

Return on assets

7.003

5.06

9.040

9.040

Assets turnover

109.9

109.9

114.2

114.2

Gross profit

34.6

34.6

34.5

34.5

Net profit

6.37

6.37

8.22

8.22

2

Efficiency

Debtors (receivables) collection period

44.3 days

44.3 days

48.3 days

48.3 days

Creditors/ Payables period

102.2 days

102.2 days

102.3 days

102.3 days

Inventories Turnover

56.5 days

56.5 days

57.7 days

57.7 days

3

Liquidity

Current or Working Capital

1.1

1.1

1

1

Quick or Acid Test ratio

0.6

0.6

0.5

0.5

4

Gearing

Gearing

44.9

44.9

42.4

42.4

Summary of company performance:

When comparing the analysis of two finanacial years we get the following results

Profitability:

The profitability ratios indicate that the profit margin of the company has decreased from 2007 to 2008. This is reflected in the net profit margin being reduced from 8.22% in 2007 to 6.4% in 2008. The return on captial employed and the net profit is reduced in 2008 which could be attributed to the increase in selling and administrative expenses of the company.

Efficiency:

The efficiency of the company has the same rate of performance in both the year except the receivables collection period which gets reduced and this results in reduced cash operating cycle for the company. The reduction in receivables collection period might have been achieved by either stricting the collection methods or giving discounts for early payments for customers. At the same time the company must pay attention to the risk associated with stricter collection which in some cases will affect the future revenue by leading to reduction of clients due to the strict rules or the clients will expect the offers even with that of the competitors.

Liquidity:

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The liquidity performance is marginally higher in 2008 compared to 2007 which could be attributed to the reduction in the recievables collection period.

Gearing:

The gearing of the company is slightly increased in 2008. This is due to borrowing of loan as reflected in the balance sheet of the year 2008.

Recommendation and Limitations:

From the ratio analysis it could be reiterated that the company could focus on reducing it's administrative and selling expenses therby increasing its net profit. From the cashflow perspective, the company should manage its cash-flow in the optimum level while not adversely implementing strict collection and late payment procedures. If these measures are employed for managing the working capital requirements then it would then this would lead to reduced revenue in future and increased pressure from suppliers thereby affecting the future cashflows.

Q 2a) CASH FLOW BUDGET

Calculation:

Formulas used:

Cash in-flows:

Cash sales per month = cash sales*selling price*.95[5% discount]

= 100*400*.95 =3800 per month

Cash receivables = credit sales before 2 months*selling price

= 100*400 =400, 00 for 7th month

Cash out-flows:

Material purchased = total quantity produced before 2 months *cost of

Materials

= 1200*200 =240, 00 for 7th month

Labour payment =total quantity produced * direct labour cost

= 1200*40 =480, 00 for 5th month

Variable production

Over Head [OH] cost = (total quantity produced * production OH cost * 0.7) + ( total quantity produced in previous month * production OH cost *0.3)

= (1400*20*0.7) + (1200*20*0.3) =26800 for 6th month

SL.NO

Cash inflow

5th month In £

6th month In £

7th month In £

8th month In £

9th month In £

10th month In £

11th month In £

12th month In £

1

Cash sales

3800

3800

3800

3800

3800

3800

3800

3800

2

Cash receivables

-

-

400000

480000

560000

640000

720000

800000

3

Scarp sales

-

-

6000

-

-

-

-

-

4

Total

3800

3800

409800

483800

563800

643800

723800

803800

SL. NO

Cash outflow

5th month

In £

6th month In £

7th month In £

8th month In £

9th month In £

10th month In £

11th month In £

12th month In £

1

Cash for material purchased

-

-

240000

280000

320000

400000

480000

520000

2

Cash paid for labour

48000

56000

64000

80000

96000

104000

96000

88000

3

Variable OH payment

-

26800

30800

37600

45600

50800

49200

45200

4

Distribution, administration cost

60000

60000

60000

60000

60000

60000

60000

60000

5

Income tax

-

-

-

-

-

180000

-

-

6

Fixed assets purchase

-

-

-

80000

-

-

-

7

Total

108000

142800

394800

537600

435200

794800

685200

713200

Q 2b) BREAK-EVEN POINTS

Formula used:

Contribution per unit = selling price per unit - total variable cost per unit

Break even quantity = total fixed cost/ contribution per unit

Breakeven point in revenue = breakeven point in units X selling price

Calculation

For 6th month

Fixed costs = 60,000

Contribution unit = 400 - 260 =£140

Breakeven point = 60000/140 = £428.57

Breakeven point in revenue = 428.57 X 400 = £171428

For 8th month

Depreciation = 1333

Fixed cost = 60,000 + 1333 =61,333

Contribution unit = 400 - 260 =£140

Breakeven point = 61,333/ 140 = £438.1

Breakeven point in revenue = 438.1 X 400 = £175240

Q 2C) MARGINAL COST COMPREHENSIVE INCOME STATEMENT

Marginal cost comprehensive income statement for the period months 7-12

Revenues/Turnover (months 7-12) £48, 68,000

Less variable costs (£34, 32,000)

Contribution £14, 36,000

Less fixed costs (£3, 65,333)

Net profit £10, 70,667

Total Credit sales = 11600 X 400= 46, 40,000

Total cash sales = 38000 X 6= 2, 28,000

Total revenue for period

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Months 7-12 = Total credit sales + Total cash sales

= 46, 40,000 + 2, 28,000

= 48, 68,000

Total fixed cost = Fixed cost + Depreciation

= 3, 60,000 + 5333

= 3, 65,333

Variable cost for period

Months 7 -12 = Total number of units produced*variable cost per unit

= 13,200 X 260

= 34, 32,000

Q 2d) PROFIT FORECAST

The company has expanded its manufacturing unit's average of 3000 per month by the acquiring the new manufacturing asset for £ 80,000, by this data the profit forecast is calculated below

Calculation:

Let us consider the month 7,

Total no. of units = 3000

Total revenue

Total revenue =1200000[3000*400]

Total revenue =£1200000

Total cost of sales:

Total Cash for material purchased = 600,000 [3000*200]

Total Cash paid for labour = 120,000 [3000*40]

Total Variable OH payment = 60,000 [3000*20*0.7) + (3000*20*0.3]

Total cost of sales =£780,000

Therefore,

Gross profit =£420,000

Total non-production costs

Total Distribution,

Administration cost = 60,000 [given]

Income tax =15,000 [180,000/12]

Total depreciation =1333.33 [(80,000/5)/12]

Total non-production costs =£76333.33

Therefore,

Net Profit = Gross profit - total non production

cost

=420000-76333.33

Profit =£343666.67

In my point of view, according to above profit forecast the company's plan of expanding is profitable to the company; anyhow at the initial stage of this expansion, the company wants to increase its bank overdraft, because the company wants to maintain its cash flow as risk less process or to reduce the insolvency. Another way for maintain the cash flow is the company wants to increase its cash sales per month. I put these suggestions because the company decided to have all the 3000 units as credit sales it action will increase the solvency risk by having improper cash flow.

Q3) MANAGEMENT ACCOUNTING

"Corporate management accounting systems are inadequate for today's environment".

Introduction

This essay describes critical discussion about the statement "Corporate management accounting systems are inadequate for today's environment" (johnson & S.Kaplan, 1987).

In general, Business has changed dramatically since 1930. Accounting has not changed at all since that time!  We need to move away from traditional Cost Accounting.  "Cost Accounting is enemy number one of productivity" (Goldratt & Cox, 1992)

Management accounting

Companies beginning to implement a lean strategy often complain that they do good things in operations, such as increase productivity and reduce inventory, but it shows up as a negative in the company's financial statements. Many accountants have been frustrated by the meaningless information generated by a standard cost system.

The complexity of our existing systems driven by the incredible number of transactions that company's process in an attempt to capture data at the smallest increment possible. Companies are processing millions of transactions through their business systems. Since those transactions are a significant source of information for the financial statements, accountants want to ensure that they are processed in a way that is complete and accurate. All of this is driven by the combination of MRP systems and standard cost accounting systems. The other significant complexity is the traditional emphasis within the accounting community on compliance rather than improvement. This situation has been exacerbated by the compliance requirements (johnson & S.Kaplan, 1987).

In order to make sensible decisions concerning the product which they market, the managers need to know what their product cost is. The product design and decisions for new products introduction will be influenced by the anticipated cost and profitability of the product.

The cumulative effect of decisions on product design, introduction, support and pricing helps define the firm enacting strategy. This strategy will be successful if the additional cost caused by producing and serving is less than the economics of scale. If the cost system fails to measure differentiation cost properly then the firm might choose to compare in a segment where these cost are too high. (J.Bruns, 1987)

Many organization or companies now identified that they are using inadequate cost systems in today's high competition. They find that the designed system is to value the inventory cost for financial and tax statements are not giving the accurate and timely information for today's managers to promote the operations efficiently and to measure product cost (Kaplan, 1988).

For an example, one chemical company's system did a job of estimating its full product cost but it can't be used for cost control. Since it gathered all product cost at each production stage and cumulatively absorbed all variances along the trail. While the system reported actual cost for all products its does not provide any information in cost reduction efforts for managers. (Kaplan, 1988)

As the competition shifted from low-cost production of products the company needs to develop new cost system to give more information about the product efficiency to the managers

The business world has only increased the speed and pressure. With this in mind, consider the unlucky accountants; they studied the numbers and theories, spent money on schools to learn an honourable profession, only to be viewed as hapless bean counters-dull individuals chasing debits and credits with no better knowledge of the larger business than any other employee. They chase transactions; have heart attacks over stray invoices. This is not why they went to college. The ingrained habits of most businesses have even reinforced the situation. The chief financial officer, who tries to embrace change, using technology to handle the more mundane jobs and freeing himself to become a better business partner and advisor, often encounters resistance. Financial executives are frustrated. And their businesses are not getting what they need. (fiume, 2003)

Conclusion

As increasing global competition, economic recession and a new focus on quality and customer service have led to a growing concern in the professional and academic accounting literature, Predicting change in management accounting systems with new product costing systems, strategic cost analysis methods, quality management, and a host of other techniques and methods that are new or are claimed to be new. The advantages for organizations by adopting new management accounting techniques are changes occurred in those systems that support decision making and changes occurred in directing systems, those used for rewarding performance. Organizational size, structure and intensity of competition did not predict changes in management accounting systems (Theresa & John, 1996).