IMAT5209 Evaluation of Ratio - Free Samples to Students
You are required to complete the worksheet in the ‘Assignment 2 Template’ for Sunbay Sales. Using the sheet labelled ‘Worksheet’ identify Sunbay Sales' business transactions for June and construct an accounting worksheet.
Note:
1. Illustrative example 4.4 on pg. 126 of the text can be used as a guide to the format required for the worksheet. You should not limit yourself to this Illustrative example only. You should also review the tutorial questions we have provided the solutions to, as well as any other subject material available.
2. Opening balances as at 31 May 2017 should be used as your starting point in your accounting worksheet.
3. In your worksheet, you must demonstrate the use of the following Excel functions:
• 'sum'
• bordering
• cell merging
• wrap text
• date.
4. Ensure that you ‘sum’ each side of your worksheet to prove the accounting equation.
Using the same Excel file that you used for Part A, you need to prepare the following financial statements of Sunbay Sales from the accounting worksheet for the 2017 financial year:
• Income statement.
• Statement of changes in equity.
• Balance sheet.
Note:
1. Illustrative example 4.5 on pp.126-127 of the text can be used as a guide to the format required for the income statement and balance sheet. Illustrative example 6.8 on the bottom of p. 245 of the text can be used as a guide to the format required for the statement of changes in equity. You should not limit yourself to these illustrative examples only. You should also review the tutorial questions we have provided the solutions to, as well as any other subject material available.
2. Each financial statement should be prepared using the named worksheets provided in the Excel template. You are required to use formulas only to transfer the figures from the worksheet into the statements (do not type figures directly into the statements, with the exception of note 4. below).
3. In your financial statements, you must demonstrate the use of the following Excel functions:
• formulas for each subtotal and total
• bordering
• cell merging
• wrap text.
4. Assume expenses incurred up to 31 May 2017 consisted of: $350 for supplies, $25,000 for wages, $880 for internet services, $8,000 for rent and $4,220 for advertising.
In the same Excel template that you used for Part A and B use the sheet labelled ‘Ratio Analysis', to complete the following:
• the table labelled 'Ratio Figures'. You are required to use formulas only to transfer the figures needed from the statements into this table (do not type answers directly into this table).
• the column labelled ‘formula’. You are required to provide the written formula for each of the ratio’s provided (first one completed for you as an example).
• the column labelled ‘2017’. You are required to use formula only by pulling figures from the table completed above 'Ratio Figures' to show the ratio calculation. (Do not type ratio answer directly into the table).
Note:
In completing the ‘Ratio Analysis’ Sheet in the Excel template, you must demonstrate that you have used the following Excel functions:
• '=/+/-'
• bordering
• merging cells
• wrap text.
Write a report to Karin Nilson, on behalf of Megan Gordon, on the financial health of Sunbay Sales for the 2017 financial year. Your report should contain the following details:
• Executive summary
• Evaluation and comparison of ratios calculated in Part C for the following areas (a minimum of two ratios for each category below).
o Profitability
o Asset efficiency
o Liquidity
o Capital structure
• Limitations of the analysis
• Conclusion, including recommendations on areas of improvement for Sunbay Sales.
In writing your report, you should refer to the online meeting in week 2, which will focus on a report writing presentation provided by the Academic Literacy Learning and Numeracy (ALLaN) team.
Your report should be between 600-700 words, excluding the cover page, contents page and references.
Rationale
This assessment task covers topics 3, 4 and 5. It has been designed to ensure that you are engaging with the subject content on a regular basis. More specifically it seeks to assess your ability to:
Analyse and interpret a range of accounting and financial transactions and reports;
Use a computer spreadsheet to assist in the preparation of business information and be able to generate and analyse a range of business results and reports; and
Employ research and report writing skills.
Answer:
Evaluation and comparison of ratios calculated in Part C
For comparing the financial information, ratios are a great tool. They provide the bird’s eye view of the major aspects of the business and hence makes the information comparable and helps in analyzing and taking decisions as per the requirement of stakeholders.
The main categories of financial ratios are:
Profitability Ratios
These categories of ratios are used to evaluate and compare the profit earning capability of the company. It not only compares the income but also the expenses and costs. The two types of ratios of this category are ("Profitability Ratios - Calculate Margin, Profits, Return on Equity (ROE)", 2018):
- Return on assets ratio– This ratio shows the return earned on the assets invested. ROA is calculated by dividing profit with total assets. This ratio helps in determining the profit generated by the assets employed. For Sunbay Sales, the return on asset is 12.20% which means that by investing $100 into assets the company is able to generate the profit of $12.20.
- Profit margin ratio– This is a profitability ratio shown in a percentage form. This is the most important ratio and is calculated by dividing the profit earned by the business with sales. For Sunbay Sales, this ratio is 30.80%. it means company is earning a profit of 30.80% on its sales.
Efficiency Ratios
For measuring and comparing the efficiency of the company’s assets and operations the efficiency ratios are used. It helps in determining the effective utilization of business assets and liabilities. The two types of ratios of this category are ("Efficiency Ratios | Example | My Accounting Course", 2018):
- Assets turnover ratio– This ratio shows the efficiency and utilization of company’s assets against its sales. It is calculated by dividing the sales with total assets employed. This ratio is expressed in times. For Sunbay Sales, this ratio is 0.40 times which means that sales are 0.4 times of assets employed.
- Times debtors turnover – This ratio shows the debtors as a percentage to sales. It shows how efficient a company is in extending credit to its debtors. For Sunbay Sales, this ratio is 4.92 times. It means sales is 4.92 times of its debtors.
Liquidity Ratios
Another set of ratios used to measure the liquidity of the company is termed as liquidity ratios. The two types of ratios of this category are ("Financial Analysis and Accounting Book of Reference: Statement of Financial Position | IFRS Statements | IFRS Reports | ReadyRatios.com", 2018):
- Current ratio– Current ratio shows the company’s ability to pay off its current liabilities from its current assets and is calculated by dividing current assets with its current liabilities. For Sunbay Sales, the current ratio is 6.13 times meaning thereby the current assets are 6.13 times of its current liabilities.
- Quick ratio– This ratio shows the relationship between quick assets and its current liabilities and measures the effectiveness of company to pay off its current liabilities from its quick assets. Quick assets are current assets less prepayments and inventories. For Sunbay Sales, this ratio is 4.84 times.
Capital Structure Ratios
Every organization has a capital structure either in the form of debt, equity or both. The optimum combination to be used and its results are measured through these ratios. The two types of ratios of this category are
- Debt to equity ratio– This is the most famous and used ratio and shows the component of debt and equity and is calculated by dividing debt with equity ("Debt-to-equity ratio", 2018). For Sunbay Sales, this ratio is 0.22 times meaning thereby the debt is 21.57% and remaining is equity in the capital structure of the company.
- Debt ratio– This ratio compares the debt of the company with the total assets employed and shows the equity as a percentage to its assets. For Sunbay Sales, this ratio is 0.16 times.
Limitation of Ratio Analysis
Although, the ratio analysis is very useful, however it has some cons as well. These cons or disadvantages include that it ignore the market price and is generally calculated on the book value of assets, liabilities, assets and equities. Further, the interpretation of ratios differ from person to person and so its uses and comparability (Bragg, 2018).
Moreover, there is no common standard or policies governing the ratio analysis, so its computation also differs from company to company and person to person.
Conclusion
By analyzing the above information and details, we can conclude that the Sunbay Sales has a good financial health. However, there are certain areas which need improvement.
Our recommendation is to improve the current ratio by optimizing the utilizing its economic resources. For this, the company can increase its current liabilities by taking short term debts, this will improve the current ratio strengthening the liquidity of the company.
References
Bragg, S. (2018). The limitations of ratio analysis. AccountingTools. Retrieved from https://www.accountingtools.com/articles/what-are-the-limitations-of-ratio-analysis.html
Efficiency Ratios | Example | My Accounting Course. (2018). My Accounting Course. Retrieved from https://www.myaccountingcourse.com/financial-ratios/efficiency-ratios
Profitability Ratios - Calculate Margin, Profits, Return on Equity (ROE). (2018). Corporate Finance Institute. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/profitability-ratios/
Debt-to-equity ratio. (2018). En.wikipedia.org. Retrieved from https://en.wikipedia.org/wiki/Debt-to-equity_ratio
Financial Analysis and Accounting Book of Reference: Statement of Financial Position | IFRS Statements | IFRS Reports | ReadyRatios.com. (2018). Readyratios.com. Retrieved from https://www.readyratios.com/reference/liquidity/
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