Balance Sheet
For the Year ended December 2017
| Income Statement | ||
| Sales Revenue | 2500000 | |
| less: Cost of Goods Sold | 1320000 | |
| GROSS PROFIT | 1180000 | |
| less: Selling Expenses | ||
| General and Administrative Expenses | 410134 | |
| Depreciation Expense | 45000 | |
| Other Operating Expenses | 55320 | |
| Total Operating Expenses | (510454) | |
| OPERATING PROFIT | 669546 | |
| less: Interest and Other Expenses | (64300) | |
| plus: Interest and Other Revenues | 24300 | |
| PRE-TAX INCOME | 629546 | |
| Income Tax | 42000 | |
| NET INCOME | 587546 |
MT480 Company
Balance Sheet
For the Year ended December 2017
| ASSETS | |
| Cash and Marketable securities | 33411 |
| Accounts Receivable | 260205 |
| Inventory | 423819 |
| Other current assets | 41251 |
| CURRENT ASSETS | 758686 |
| Gross plant and equipment | 1931719 |
| Less accumulated depreciation | -419044 |
| Net plant and equipment | 1512675 |
| Goodwill and Other Assets | 382145 |
| Net Fixed Assets | 1894820 |
| TOTAL ASSETS | 2653506 |
| LIABILITIES AND EQUITY | |
| Accounts Payable | 378236 |
| Notes Payable | 14487 |
| Wages Payable | |
| Taxes Payable | 21125 |
| Current Portion of Long-Term Debt | |
| CURRENT LIABILITIES | 413848 |
| Long-Term Debt | 679981 |
| TOTAL LIABILITIES | 1093829 |
| Common Stock (10,000) | 10000 |
| Additional paid capital | 975465 |
| Retained Earnings | 587546 |
| Less treasury stock | -13334 |
| TOTAL EQUITY | 1559677 |
| TOTAL LIABILITIES AND EQUITY | 2653506 |
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MT480 Company
Statement of Cash Flow
For the Year ended December 2017
| 22 | Net Income | 587546 | |
| 23 | Depreciation Expense | 45000 | |
| 24 | Net Income plus Depreciation Expense | 632546 | |
| 25 | plus: Increase in Accounts Payable | 49600 | |
| 26 | Increase in Other Payables | 56000 | |
| 27 | less: Increases in Accounts Receivable | 82000 | |
| 28 | Increase in Inventory | 8600 | |
| 29 | OPERATING CASH FLOW | 647546 | |
| 30 | plus: Net Cash from Financing Activities | 18920 | |
| 31 | less: Net Investment Outlays | 224300 | |
| 32 | NET CASH FLOW | 442166 | |
| 33 | plus: Beginning Cash | 9560 | |
| 34 | ENDING CASH BALANCE | 451726 |
Factors Related to the Financial Statements
The financial statements show that the company adheres to the provisions of the U.S GAAP that requires companies to provide reports on their overall financial conditions, profit-making operations, and cash flows. GAAP requires entities to maintain a balance sheet, income statement and a cash flow statement. The balance sheet shows a summary of the assets held by the company and sets them equal to the equity and liabilities of the company. The income statement shows the revenues and expenses for a reporting period. it shows the profitability of the company. The cash flow statement records the cash into and out of the company. It shows real cash flows and therefore shows the liquidity, investment and the ability to collect the receivables of the company (Chakrabarti, 2006; Duska, Duska & Ragatz, 2011).
Ratio Analysis
Liquidity ratios
Current ratio =Current assets/Current liabilities
= 758,686/413,848
= 1.83
Quick ratio = Current assets –inventory/ Current liabilities
= 758,686 – 423,819/413,848
=334,867/413,848
=0.809
Absolute liquidity ratio = Cash + marketable securities/ Current liabilities
= 33411/413,848
=0.081
The liquidity ratios show that the company has current assets to meet its cash obligations when they fall due. The current ratio indicates that the current assets are 1,8 times the current liabilities showing that it is possible to pay the entire amount for the current liabilities using the current assets and still maintain a sizeable amount of the current assets. The quick ratio shows that the company can manage its near-term cash needs using its current asset. It is, however, necessary for the management of the company to enhance the current ratio to at least two times and the quick ratio to one.
Debt management
Debt to equity = Total debt/ Total equity
= 679,981/1559677
= 0.436
Debt to asset ratio = Total debt/ Total assets
= 679,981/2653506
= 0.256
Debt ratio = Total Liabilities/Total assets
= 1093829/2653506
= 0.412
Interest coverage = EBIT/Interest expenses
= 669546/64300
= 10.413
The debt management ratios show that the company has a higher equity than debt which makes it secure as it is not expected to pay a high interest and principal amount. The company’s interest coverage is 10 times which shows that its cash flows will not be affected by the interest paid on debt.
Profitability Ratios
Gross profit margin = Gross profits/Revenues
=1180000/2500000
=0.472 or 47.2%
Operating margin = Gross profits-operating expenses/ Revenue
=669546/2500000
= 0.268 or 26.8%
Profit margin = Net income/Revenues
=587546/2500000
= 0.235 or 23.5%
Earnings per share = net income/Weighted average outstanding shares
=587546/492732
= 1.19
The gross profit margin ratio shows that the company is more efficient in its operations given that the value is high. The value shows that the company can outperform its closest rivals or has improved its performance over the previous year. The operating margin also shows that the company is performing well as can be seen by this value which is computed by deducting more expenses. The business is also profitable as shown by the profit margin and therefore raises adequate profits for its owners. The earnings per share show that the business is appropriate for investment (Britton & Waterston, 2013).
Market Ratio
Inventory turnover = Cost of goods sold/ Average inventory
=1320000/423819
=3.115
Asset turnover = Net revenues/Assets
=2500000/2653506
=0.942
The inventory turnover shows the number of times the inventory of the company is converted into cash. The company seems to lack an effective sales strategy given that the inventory turns over three times whereas a larger value is more desirable. The asset turnover shows the revenues as a share of the investment made in the company. The company is not using its assets appropriately as the ratio is less than one whereas a higher ratio is more desirable.
Management Roles and Responsibility
The management of the company is responsible for ensuring that the financial statements of the company are a true reflection of the company's operations. The management is responsible for promoting a culture of honesty, trust, and corporate social responsibility. The management ensures that the company adheres to the U.S GAAP and periodically updates its operations to reflect any significant events that might affect the financial statements (Chakrabarti, 2006).
The company has developed a new policy for doubtful debts that decreases the allowances by 20%. The new changes were warranted by experience and a prevailing best practice by firms in the same industry. Experience shows that the doubtful debts have been over provided for and therefore there was a need to change the practice to reflect the new changes. The decision will help to reflect the true doubtful debts and avoid the current practices that over provide for doubtful debts (Duska, Duska & Ragatz, 2011). The practice is not illegal but its ethical in that the financial statement will reflect a true and fair view of the status of the company. The profits of the company will also indicate a higher value which is good for the management, investors, and employees.
The company should write down the inventories by 10% following the adoption of new inventory valuation where older inventory management process where the first inventory is the first to be sold. The new approach ensures that the company does not maintain older inventory and therefore minimize the current losses by 10%. The current practice is both legal and ethical because it encourages good management practices and avoids wastage in the company. Similarly, it encourages efficient inventory management practices (Duska, Duska & Ragatz, 2011).
The company should adopt depreciation on a straight line rather than the current practice where accelerated depreciation is used. The use of this technique allows the allocation of the same depreciation in each year (Britton & Waterston, 2013). It is possible to compute the depreciation of the asset using this technique which is legal and ethical since companies are mandated to use a simple technique that is easy to compute and understand yet reflect a true account of the assets to be depreciated.
The company should delay the accounts payable by an additional 20 days to improve its cash management and as such be able to meet cash management needs with easy (Britton & Waterston, 2013). The practice is legal as the company is engaging the suppliers on new terms. However, it is unethical to hold the accounts payables for an additional 20 days in order to manage the cash of the company at the expense of the supplier. The policy will increase the cash balances for the company at any time and reduce the cash balance for the suppliers
The adoption of the new policies requires the support of the entire organization. Different departments throughout the company must collaborate to ensure that the new policies are adopted and put into use as soon as possible. Management buyouts will be used to encourage the participation of the entire organization. Teamwork and collaboration by the different departments will be desired for the success of the new policies.
References
Britton, A., & Waterston, C. (2013). Financial accounting . Harlow: Financial Times Prentice Hall.
Chakrabarti, A. (2006). Understanding U.S. GAAP in the Context of Indian Companies Financial Reporting Practices. Asia Pacific Business Review , 2 (2), 1-12. doi: 10.1177/097324700600200202
Duska, R., Duska, B., & Ragatz, J. (2011). Accounting Ethics . Hoboken: John Wiley & Sons.
