Bus106 Accounting For Business Assessment Answers

You have randomly been assigned an Australian publicly listed company. This list is located on blackboard under the Task 2 assessment folder.

You are required to access the financial statements of this company for the last two reporting financial years and complete the following requirements:

Requirement 1: Provide a brief description/ overview of your company in your own words.

Requirement 2: Calculate the ratio for your company for the last two reporting years and show all your workings:

• Current Ratio
• Quick Ratio
• Gross Profit Margin
• Return on Equity
• Return on Assets

Requirement 3: In your own words, using appropriate references, provide a definition of each of your ratios.

Requirement 4: State what each of these ratios say about your company with reference to appropriate benchmarks that you should have identified above in your definitions.

Requirement 5: Choose another company within the same industry as your company and calculate and define the days inventory ratio for your company and the chosen company. How does your company inventory management practices compare to the chosen company?

Introduction

Purpose

The purpose of the following report is to have an insight in the financial performance of the company Coca Cola Amatil. The following report contains an analysis on the financial data, which will help us understand the viability of the company. The following will also help us understand how ratio analysis works and how it can practically be implemented in the real world. (Atkinson, 2012)

Scope

The following report include implantation of various ratios and there definition. The same has been done in relation to the company- Coca Cola Amatil. References to various books based on ratio analysis and the annual report of the company has been made for this. (Berry, 2009)

Limitations

Since the ratio analysis of the company has been done based on past data, it does not mean that the same level of performance can be expected in the coming years. The ratio analysis tool fails to incorporate qualitative data that are mentions in the notes and which may affect the affect of the decision maker. Therefore, the results of the report are to be read keeping in mind these limitations.

Company Overview

The company was originally established in 1904 as British Tobacco (Australia). Later the company acquired Coca-Cola Bottlers (Perth) in 1964, and began to put it hands in the soft drinks business. The company then applied for getting listed on the Australian stock exchange in 1972. (Boyd, 2013)

Coca cola amatil is one of the largest suppliers of non alcoholic drinks in asia pacific region. It operates in six countries which are- Australia, Fiji, New Zealand, Australia, Papua New guinea and Samoa. (Datar M. S., 2015)The products that are supplied by the company includes spring water, soft drinks, energy drinks, fruit juices, coffee, tea as well as flavoured milk.

This company is listed on the Australian stock exchange and the coca cola company holds about 29.37% of shareholding in the company. It is usually notices that the coca cola company holds such huge stakes in the company’s that are involved in this sector. (Datar S. , 2016)

RATIO ANALYSIS

Current ratio

Current ratio is used to ascertain the liquidity position of the company. This ratio is calculated by dividing the current assets by current liabilities. It is used to check whether the company is able to satisfy its short term liabilities using its current assets or not. (Holtzman, 2013) Current assets include all assets that can be readily converted into cash say within a year and also current liabilities are those liabilities which the company has to pay within a year.  Usually, a current ratio of 1 is considered to be favourable. If the ratio is below 1 then it is unfavourable and it means that the company is unable to meet its current liabilities. In the given case, we see that the current ratio in the year 2016 is 1.68 which shows that the company hold a good amount of liquidity. However, in 2017 it is observed that the ratio has fallen to 1.52.

Quick ratio

Quick ratio also helps to know about the liquidity position. However, it is more stringent measure of liquidity. As we know, in current ratio we take into conisation all the current assets that are held by the company but in case of quick ratio inventories and prepayments are subtracted. (Horngren, 2012)The logic behind subtracting these from the current asset is that the inventories are cannot be cannot be immediately converted into cash. It takes time to get converted. Quick ratio is a more appropriate measure of liquidity and it actually gives a clear picture of the liquidity position of the entity. The quick ratio for the year 2016 is 1.30 whereas the current ratio for the same year was 1.68. The difference between both of these ratios has arisen because we have excluded inventories and prepayments. However, the quick ratio has fallen from 1.30 to 1.12 in the year 2017 which shows that the company has minimised keeping or maintain more liquidity than before.

Gross profit margin

Gross profit margin is a measure of profitability. This ratio is calculated by dividing the operating income by the total revenue. It not only shows how much profit the company has earned but also indicated the efficiency by which uses its labour and materials in the production process. The residual amount that is left after paying for the cost of goods sold is known as the gross profit.  It is usually measured in terms of percentage.

As we can see in the above table, gross profit of the company has decreased in the year 2017 when compared to 2016. This is considered to be unfavourable. Also there is a fall in the value of sales. Although the gross profit margin is remaining constant over the years, it is considered to be bad because of the gross profit and sales figure. The shareholders of the company always expect the company to earn higher profits so that their wealth could be maximised. If there is no growth in the sales of the company then it is obvious that the company is not earning higher returns.

Return on equity

Return on equity ratio (ROE) is also a kind of profitability ratio that helps to measure the ability of a company to generate profits with the help of the investments that are made by the shareholders. (McLaney & Adril, 2016) We can also say that this ratio helps us to determine the profit earned on each dollar of shareholder’s equity. This ratio is considered to be higher the better because in order to flourish in the long run it is important to maximise the wealth of the shareholders. As it is a measure of profitability it is also expressed in terms of percentage. From the above table, we can conclude that the company is able to maximise the wealth of its shareholders as the ROE has increased from 11% to 25% from the year 2016 to 2017.

Return on sales

The return on sales ratio is also known as Net profit margin. This ratio indicated the income earned by the company with the help of total revenue generated. Higher the net profit ratio the better it is. If the net profit margin is higher compared to the previous years then it clearly shows that the company is more efficient at converting sales into actual profits. As we can see from the above table, the net profit margin was 5% in 2016 whereas it increased to 9% in 2017. The increasing net income and sales both are a good sign for the company which shows that the company is growing. (Picker, 2016)

Analysis and Comparison using the Inventory Ratio

The inventory turnover ratio is calculated by dividing the cost of goods sold by average inventory. All the companies take into consideration the average inventory instead of the ending inventory because there is a lot of fluctuation in the inventory management. (Piper, 2015)

Inventory turnover ratio is calculated in order to determine the efficiency by which the management manages the inventories of the company. (Seal, 2012)  This ratio helps us to know the number of times inventory is converted into sales. This ratio is considered to be significant because of two major components. The first one is the purchasing power of the company and the second component is sales. In relation to the first component, it is obvious that if the company is able to purchase more inventories it will be able to sell more goods which will help in the improvement of turnover ratio. The reason for the second component is that it is important for the company to match its sales with the purchases otherwise it is concluded that the company has not managed its inventories effectively. Therefore, it is important for the purchase department and sales department to coordinate with each other in order to maintain the balance. (Raun, 1962)

The inventory turnover ratio is calculated and explained below:

The inventory turnover ratio of coca cola amatil for the year 2017 is 4.22 times whereas it is 2.35 times for Blackmore limited. Both the companies lie within the same industry which is consumer staples. However, such difference in the turnover ratio is a sign of difference in efficiency of managing the inventory. This ratio is considered favourable when it is higher. So, we can say that coca cola amatil’s inventory management is more efficient than Blackmore limited.

References

Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.

Berry, L. E. (2009). Management accounting demystified. New York: McGraw-Hill.

Boyd, W. K. (2013). Cost Accounting For Dummies. Hoboken: Wiley.

Datar, M. S. (2015). Cost accounting. Boston: Pearson.

Datar, S. (2016). Horngren's Cost Accounting: A Managerial Emphasis. Hoboken: Wiley.

Holtzman, M. (2013). Managerial Accounting For Dummies. Hoboken, NJ: Wiley.

Horngren, C. (2012). Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall.

McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United Kingdom: Pearson.

Picker, R. (2016). Australian accounting standards. Milton, Qld.: John Wiley & Sons.

Piper, M. (2015). Accounting made simple. United States: CreateSpace Pub.

Raun, D. L. (1962). What is Accounting? The Accounting Review , 769-773.

Seal, W. (2012). Management accounting. Maidenhead: McGraw-Hill Higher Education.