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WUCB104 Accounting in Organisations

Published : 13-Sep,2021  |  Views : 10

Question:

You are required to submit a portfolio in a plastic sleeve consisting the processes of your part of the work done in the completion of the group project. Each piece of work should be dated, and placed in chronological order. At a minimum your portfolio must contain This should reflect on the learning process that you have undergone in doing this assignment. Points addressed should include what you felt you did well, and what you would do differently next time.

Answer:

Elders Limited is one of the biggest agricultural based business organizations which is engaged in providing services to farmers or primary producers. Services of Elders limited includes financial services, real estate services, livestock trading and many other services to primary producers (Bujaki and Durocher, 2012). Following are some servicers that is provided by Elders limited:

Rural Services 

  1. Network Operation
  2. International Trading
  3. Network Operation:-

Supply of Products and services includes: 

  1. Farm input: supply of agriculture chemicals, fertilizers, grain, animal health and general rural merchandise.
  2. Marketing and sale of farm output
  3. Real estate and property services
  4. Financial services and distribution.

It has 213 branches in Australia; 99 real estate and insurance branches and 145 real estate franchises.

  1. International Trading:

Offshore marketing with primary producer delivering a range of live stock, food, fiber solutions has been provided by Elders Limited. Feed lots supply in Australia and Indonesia and wool supply in China.

(B) Automotive Operation:

  • Deals in designing and manufacturing of seating system and seating hardware, door trim, headliner, floor carpet etc 
  • Steering pedals and Ills assemblies etc

Business operations of Elders limited in term of automotive business operations includes: Australia, China, Thailand, North America, South America etc.

The names and qualifications of the directors. Make a comment about the number of directors, their ages and qualifications, diversity etc. Do you think they demonstrate the requisite skills needed for the job? Why? What would you add 

Name and qualification of directors

1- Mr. John c Ballard (Chairman)

  MBA, FAICD, Age 66

2- Mr. Malcolm G Jackman (MD)

  B.Sc, B.com, Age 60

3- Mr. Mark c Allison 

 Bagrsc, Becon, Gdm, Faicd, Age 51

  1. Mr. Ian G Macdonald

  Sf fin , Age 58

  1. Mr. James H Ranck

BSecon, Faicd, Age 64

  1. Ms. Jose Phincm Rozman 

Bec, CA, Faicd, Age 53

Not less than 3 directors and not more than 12 directors. 

Chairman and majority of directors should be independent.

Retirement policy: at least 1/3 directors (except MD) which are completed 3 years or more required to retire in AGM and may stand for reelection.

Diversity: company has a diversity policy and has established following diversity objectives:-

  1. Increase the representation of woman in management position.
  2. Maintain number of female non executive director
  3. Increase in the woman participation in development and monitoring program. 

Ernst & young and Mark Phelps (Refer Independent auditors report)

A: Cost of sales $ 1724359000

B: Profit or (loss) before tax for the year 2012: 

From continues business only = $ (53982000)

Loss for year 2011 = $ (105780000)

Change in profit: increase in profit or decrease in loss in year 2012 : $ 51798000

C: Income tax expense during the year?

$ 10414000

D: Amount of net receivable of each item 

Trade receivable (net) = $ 443591000

+ receivable of associate = $ 11353000

+ finance debtor $ 1692000

+ Other current receivable $ 41379000

=Total current receivable: $ 498015000

+Non - current receivable: $ 18522000

E Method of bad debts: 

Individual debt, if uncollectible, required to written off, when identified.

If group debt is default for a period greater than 60 days considered objective evidence of impairment and recognized as impairment for provision.

F Methods of depreciation: straight line method used by company.

Amount of each type of property plant and equipment:-

Freehold land = $ 6669000

Building = $ 14722000

Leasehold improvement = $ 10928000

Plant and equipment (owned) = $ 50227000

Plant and equipment (leased) = $ 1412000

Asset under construction = $ 11726000

Depreciation:

Property and equipment = $ 14051000

Leased asset = $ 248000

Design and development = $ 3868000

Patent and trademark = $ 2850000

Total depreciation = $ 21017000

G: The amounts of each type of long-term liability

H: The amounts and nature of any contingent liabilities

  1. Claim lodged for damage resulting from use of products and services of $ 525000
  2. Guarantee issued to third parties arising in normal course of business in relation to obligation of a former subsidiary Carver sham property development Pty limited = $ 3,552,0000

(I) Value of issued capital

$ 12749300

Using the consolidated figures, provide a brief assessment of the liquidity of the company (quick ratio, current ratio, Accounts Receivable Turn Over, Inventory Turn Over), and comment on your analysis.

Ratio analysis is used to analyze financial position and financial performance of business organization in reporting period. There are various ratios that are used for the purpose of analyzing financial results of the business organization (Adewuyi, 2016). On the other hand there are some limitations of ratios also, that are required to manage by financial manager. There are majorly four types of ratios i.e. profitability ratio, solvency ratio, liquidity ratio and efficiency ratio (Liem and Sautma, 2012).

Liquidity in of the business organization can be defined as the level of cash availability that business operations has. Liquidity of the business organization is measured in terms of its current assets and current liabilities or obligations that they have (Bogdan, Baresa & Ivanovic,., 2012). Liquidity is of the core requirement of the business organization in order to manage their business operations. Liquidity ratio is used assess management capabilities of day to day business operations and access cash availability and requirement (Costea, 2009). Under liquidity ratio analysis there are four major ratios that are calculated and they are follows:

Quick ratio- Quick ratio measures or calculates dept analysis of liquidity of the business organization. While calculating quick ratio, stock / inventories and prepaid expenses of the business organization is reduced while figuring quick assets. Quick assets include only those current assets that are available with business organization. On the other hand, current liabilities remain the same for the purpose of calculation (Soyode and Bande, 2016). Quick ratio measures actual state of liquidity position of the business organization. Following is the formula of quick ratio:

Quick ratio = Quick Assets / Current liabilities or current obligations

Quick Assets = Current assets – (stock / inventories + Prepaid expenses)

In case of Elders limited, following is the calculation of quick ratio for the year ended September 30, 2012:

Quick ratio = Quick Assets / Current liabilities or current obligations

Quick Assets = $ 915,112 – ($ 166,975 + $ 17,037)

Quick Assets = $ 915,112 – $ 184,012

Quick Assets = $ 731,100

Current liabilities = $ 814,234

Quick ratio = $ 731,100 / $ 814,234

Quick ratio = 0.898 times

(Borhan and Mohamed, 2014)

Interpretation: From the above calculated quick ratio or acid test ratio, it can be analyzed that Elders limited has been facing serious issue of liquidity in its business operations. Since quick ratio is less than one i.e. 0.898 times which means, Elders Limited does not has sufficient funds or cash availability to manage their day to day business operations. This situation can lead to many suits filed against Elders Limited due to non -payment of current obligations. On the other hand, Elders Limited needs to borrow or pay their current obligations by borrowing short term finance or bank overdraft from banks or financial institutions.

Therefore this will increase cost of capital or weighted average cost of capital of Elders Limited and hence their profitability and solvency positions will also get impacted (Value, 2013).  Quick ratio or acid test ratio also measures the ability of business organization in terms of using their cash or cash equivalents in the business operations. In case of Elders limited, quick ratio demotes that they are available with only 0.898 cent as compared to its $ 1 current obligation. In other words, Elders Limited is required to borrow $ 0.102 to pay its current obligation or current liabilities of $ 1. It can be observed that most of the quick assets is consists of trade and other receivables and as compared to other business organization inventory level of Elders limited is quite low.  

Current ratio

Every company or firm has its liabilities that are required to be paid off. The company will have to analyses that whether it has the sufficient current assets to pay off its current liabilities. For this Current ration helps them to measure the company’s or firm’s ability to pay off its short term liabilities with its current assets. It basically shows the liquidity of the company and is also known as liquidity and efficiency ratio (Dragomir, 2007). Current ration gives an idea about the time left with company to pay its short term liabilities through its current assets. Current assets such as cash, marketable securities, cash equivalents, etc. have a short time in which the same could be converted to cash, which means that more the current assets available with the company, it will be easier for them to pay their short term liabilities when they become due.

The ideal current ratio is 1:1, which means the ratio is considered good when it is equal or is more than 1:1. If the current ratio is less than 1 then it means that the current liabilities are more that the current assets which might result in problems in dealing with its short term transactions which are to be paid off. Where the current ratio is more than 1 it is always considered good as the paying capacity of the current liabilities of the company is more through its current assets. Current ratio is calculated by dividing the current assets by the current liabilities.

Current Ratio = Current Assets/ Current Liabilities.

According to the data of Elders Limited the current assets are $915,112 and the current liabilities are $814,234. Hence, after applying the formula which is Current Assets/ Current Liabilities the ration comes out to be 1.124 times.

The ratio is more than 1 which is considered to be good as the company is capable of paying off its current liabilities through its current assets, which means that if Elders Limited have a current liability of $1 to be paid, then the company is capable of paying the same as the capacity to pay the liabilities by the company through its current assets is up to $1.124. Also we can say that the liquidity position of the company is good and it will help the management in making their decisions on short term basis with accuracy. As the current ratio gives an idea to the management about the capability to pay the liabilities it also helps the investors and creditors of the company to analyze the liquidity position of the company and the capability of the company to pay the amount borrowed by them (Zbigniew and Witczyk, 2009). To conclude we can say that the Elders Limited has a good liquidity position and that the current ratio is the helping tool to analyze the entire position of the company to pay off its current liabilities. The current ratio also shows the clear picture of the debt position of the company and how to get good results in a short span of time.

Accounts Receivable Turn Over

Accounts receivable turnover ratio indicates the time that denotes no of times business organization receives average debtors during the year or during the reporting period. In order to calculate accounts receivables turnover ratio, average debtors are required to be calculated and net credit sales of business organization during the reporting period are required. Accounts receivable turnover ratio is used to measure ability of business organization in terms of managing their debtors during the year in terms of credit period (Kumar, 2011). Business organization should be efficient enough to manage their credit sales and this ability is determined with the help of Accounts receivable turnover ratio. Following is the formula to calculate Accounts receivable turnover ratio:

Accounts receivable turnover ratio = Net credit sales during the period / (Average Debtors during the period)

Average Debtors during the period = [Beginning Accounts Receivable + Ending Accounts Receivable] / 2

If accounts receivable turnover ratio is at higher side then this indicates higher level of efficiency in terms of managing receivable or debtors during the reporting period. Generally higher Accounts receivable turnover ratio is achieved when business origination is having effective credit policy and collection system or debt recovery system of business organization is also efficient. On the other hand, low accounts receivable turnover ratio denotes inefficient credit policy of business organization or non existence of credit policy (Ogiela, 2012). Therefore low accounts receivable turnover ratio denotes less efficiency in liquidity of the business organization. In case of Elders limited, following is the accounts receivable turnover ratio for the year ended September 30, 2012:

Accounts receivable turnover ratio = Net credit sales during the period / (Average Debtors during the period) / 2

Net credit sales during 2012 = $ 1938,260

Beginning Accounts Receivable = $ 91,969

Ending Accounts Receivable = $ 81,614

Accounts receivable turnover ratio = [$ 1,938,260 / ($ 91,969 + $ 81,614) 2]

Accounts receivable turnover ratio = [$ 1,938,260 / (173,583) / 2]

Accounts receivable turnover ratio = [$ 1,938,260 / $ 86,791.50]

Accounts receivable turnover ratio = 22.33 times or 22 times

(Elders Limited, Annual Report 2012)

Interpretation: From the above calculated accounts receivable turnover ratio of Elders Limited for the year ended 2012, it can be analyzed that their accounts receivable turnover is 22 time during the reporting period. 22 times accounts receivable turnover ratio denotes that Elders Limited receives cash or cash equivalent 22 times from their debtors during the reporting period. 22 times accounts receivable turnover ratio is used in calculating average collection period of credit sales revenue from debtors (Fuhrer and Steiner, 2017). In case of Elders limited, following is the average collection period during the year ending 2012:

Average collection period in 2012 = Days in a year / Accounts receivable turnover ratio

Accounts receivable turnover ratio = 22 times

Days in a year = 365 days

Average collection period in 2012 = 365 days / 22 times

Average collection period in 2012 = 16.59 days.

It can be observed that 16.59 days as average collection period denotes higher efficient solvency ratio in the business operations. On the other hand, higher average collection period also manages liquidity in the business operations at optimum level. Therefore at last it can be concluded that liquidity level in terms of accounts receivable turnover ratio and average collection period has shown positive results. Liquidity level of Elders limited is good since it has higher accounts receivable turnover ratio and lower average collection period during the year (Mukherjee and Roy, 2015).

Inventory Turn Over

Inventory turnover ratio is used to measure or calculate turnover rate of inventories or usage rate of inventories during the reporting period by business organization. With the use of inventory turnover ratio, investment in stock or inventories made by business organization can be assessed or measured (Peavler, 2016.). Inventory planning or investment in inventories can be analyzed from the Inventory turnover ratio. Inventory turnover ratio also denotes liquidity position of the business organization during the reporting period. If inventory turnover ratio is at higher side that means, business organization has managed and controlled their purchase system. In other words, higher inventory turnover ratio indicates effective purchasing system (Kirkham, 2012).

Higher inventory turnover ratio also denotes fewer amounts is blocked in cash reserves and has been achieving high level sales revenue during the reporting period. Inventory turnover ratio also indicates higher level of sales and there will be effective sales revenues during the reporting period. On the other hand, lower inventory turnover ratio denotes less effective purchasing system of business organization and incurred higher cost on purchase management in the business organization. Lower inventory turnover ratio also denotes higher investment in inventory or stock of business organization (Lainez and Callao, 2000). Therefore lower inventory turnover ratio impacts liquidity of the business organization in negative manner.

Following is the formula of calculating inventory turnover ratio for the year ending September 30, 2012:

Inventory turnover ratio = Cost of goods sold / Inventory of the reporting period

In case of Elders Limited, inventory turnover ratio can be calculated as follows:

Cost of goods sold = $ 1,724,359

Inventory of the reporting period = $ 166,975

Inventory turnover ratio = $ 1,724,359 / $ 166,975

Inventory turnover ratio = 10.32 times

Interpretation: From the above calculated figure of inventory turnover ratio, it can be analyzed that, up to 10.32 times inventory of Elders limited is turn around during the reporting period. Inventory turnover ratio is also used to calculate inventory turnover period during the reporting period or during the month (Mittal et al., 2014). Inventory turnover period is used to denote inventory holding period of the business organization i.e. for how many days or months inventory is held in hand by the business organization is measured by the inventory turnover period (Shah, 2015.). Following is the formula of inventory turnover period or inventory holding period:

Inventory turnover / holding period = No of days in year / Inventory turnover ratio

No of days in year = 365

Inventory turnover ratio = 10.32 times

Inventory turnover / holding period = 365 / 10.32 times

Inventory turnover / holding period = 35.36 days or 35 days

In case of Elders limited, their inventory turnover or inventory holding period is 35 days. This means, Elders limited is able to manage inventory or able to hold inventory for 35 days and 10.32 times in a reporting period.  

References

Adewuyi, A.W., 2016. Ratio Analysis of Tesco Plc Financial Performance between 2010 and 2014 in Comparison to Both Sainsbury and Morrison’s. Open Journal of Accounting, 2, 5, pp.48-54.

Bogdan, S., Baresa, S., & Ivanovic, S., 2012. Measuring Liquidity on Stock Market: Impact on Liquidity Ratio. Tourism and Hospitality Management, 18, 2, pp. 183-193.

Borhan, H., & Mohamed, R., 2014. The impact of financial ratios on the financial performance of a chemical company. World Journal of Entrepreneurship, Management and Sustainable Development, 10, 2, pp. 154-160.

Bujaki, M., & Durocher, S., 2012. Industry Identification through Ratio Analysis. Accounting Perspectives, 11, 4, pp. 315-322.

Costea, C., 2009. The Liquidity Ratios and Their Significance in the Financial Equilibrium Of The Firms. The Faculty of Economics and Public Administration, 9(9), pp.255-58.

Elders Limited- Annual Report 2012. (2013, April 26). ENP Newswire, p. ENP Newswire, April 26, 2013.

Fuhrer, Müller, & Steiner., 2017. The Liquidity Coverage Ratio and security prices. Journal of Banking and Finance, 75, pp. 292-311.

Kirkham, Ross., 2012. Liquidity analysis using cash flow ratios and traditional ratios: The telecommunications sector in Australia.(Report). Journal of New Business Ideas and Trends, 10, 1, pp. 1.

Kumar, V., 2011. Debtor Turnover Ratio. [Online] (1) Available at: http://www.svtuition.org/2011/11/debtor-turnover-ratio.html [Accessed 04 April 2017].

Lainez, & Callao., 2000. The effect of accounting diversity on international financial analysis: Empirical evidence. International Journal of Accounting, 35, 1, pp.65-83

Liem Pei Fun, & Sautma Ronni Basana., 2012. Price Earnings Ratio and Stock Return Analysis (Evidence from Liquidity 45 Stocks Listed in Indonesia Stock Exchange). Journal Manajemen Dan Kewirausahaan, 14, 1, pp. 7-12.

Mittal, Sanjiv, Mittal, R.K, Singh, Gagandeep, & Gupta, Sunil. 2014. Inventory Management in Fertiliser Industry of India: An Empirical Analysis. Asia Pacific Journal of Management Research and Innovation, 10, 4, pp. 291-303.

Mukherjee, P., & Roy, D., 2015. Liquidity Management: A Multivariate Analysis of Financial Indicators of Two Steel Plants. Asia Pacific Journal of Management Research and Innovation, 11, 1, pp. 66-71.

Ogiela, L, 2012. Data management in cognitive financial systems. International Journal of Information Management, International Journal of Information Management.

Peavler, R., 2016. What is the inventory turnover ratio and how is it calculated? [Online] (1) Available at: https://www.thebalance.com/what-is-inventory-turnover-ratio-and-calculation-393202 [Accessed 04 April 2017].

Shah, M.B., 2015. A Financial Ratio Analysis of Hindustan Unilever Limited (HUL). International Multidisciplinary Research Journal (RHIMRJ) , 2(5), pp.4-5.

Soyode, A., & Bande, B., 2016. Predicting corporate financial troubles with accounting ratios : Evidence from Nigeria. Journal of Financial Management & Analysis, 29, 1, pp. 38.

Value, D., 2013. A Guide to Useful Ratios for Understanding Your Social Enterprise’s Financial Performance. Demonstrating Value, pp.7-8.

Voicu-Dan Dragomir., 2007. Financial Ratio Analysis: The Development of a Dedicated Management Information System. Theoretical and Applied Economics, 1, 506, pp. 77-84.

Zbigniew Go?a?, & Anna Witczyk., 2009. Analysis of enterprise financial liquidity on the example of the confectioner's trade., Journal of Agribusiness and Rural Development, 01 January 2009, Vol .4, pp. 14.

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