Accounting Business Report with Calculation in Strategic Accounting for Decision-Making1

Accounting Business Report with Calculation in Strategic Accounting for Decision-Making

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Dec 23, 2010.

 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making2

Abstract

The analysis of Financial Statement on organization is a passage to have first-hand knowledge

about the financial health of the organization, adding in ratio analysis, will provide more in-depth

information about the firm. The information obtained from these financial sources are helpful for

the investors, since they will help them in making effective and appropriate decisions towards

making investments in a particular firm. Any organization felling below the optimal level will

not be considered for making investments, rather these kinds of analysis are so much revealing

that they can have a huge influence on the image of a particular organization.
 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making3

Introduction

Company Profile

Fairvalue’s core activities emphasizes on the management of swimming pools. Many of these

pools had previously been owned by limited authorities, but have recently been privatized as an

answer for the move to reduce civic expenditures. The company’s two most recent acquisitions

(purchased in May 2008 from Mid Valleys Local Authority) are Central Pool in Cardiff and Taff

View Pool in the suburbs of Pontypridd. Shane Jones has recently been promoted to Finance

Director at Fairvalue Leisure Ltd, a small but growing leisure management business operating

across South East Wales.

In the next section, the balance sheet and income statements of Fair Value would be presented

and analyzed, so as to gain first-hand knowledge about the financial health of the organization.

The information obtained from the analysis of these financial statements will be obviously

helpful in determining the current position of the organization in the marketplace based on which

effective economic and investment decisions could be made.

Ans-1)

The income statement is the name for displaying the revenues recognized for a specific period,

and the costs that have incurred revenues. The income statement is a company's financial

statement that measures a firm’s financial performance over a specific period of time, in

accounting terms, this time is known as accounting period (Brigham and Ehrhardt, 2008). The

performance is evaluated by providing a summary of the revenues earned by the company and

the operating and non-operating expenses which incurred to the business. Profit is the difference
 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making4

between the Revenues generated by a business and the costs incurred in order to generate those

revenues. An income statement also shows the profit and losses of the business, that is why, it is

alternatively known as Profit and Loss Statement (Brigham and Houston, 2007).

The income statement of Taff View Pool is presented below,

Income Statement of Taff View Pool for the year ended 2010
Revenue 1,570,000
Less: Cost of Goods Sold -162,000
Gross Profit 1,408,000

Less: Expenses 1,228,000

Net Profit 180,000

Balance Sheet

The balance sheet of Taff View Pool is illustrated underneath,

Balance Sheet of Taff View Pool for the year ended 2010

Assets
Cash 41500
Debtors 3000
Land and Buildings 929,500
Machinery (After Depreciation) 296,000
Stocks 17,000
Total Assets 1,287,000

Liabilities
Creditors 53,000
 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making5

Long Term Liability 120,000

P & L CF 30,000
Unearned Revenue 3,000
Net Profit 180,000
Capital 895,000
Total Liabilities 1,284,000

Ans-2a)

A ratio on its own is also almost meaningless. It comes to life when different ratios are

compared over a time period or when one company is compared with another company

belonging to the same industry. There are many different types of ratio, but the researcher is

interested in those that aid managers to manage more effectively (Drury, 2001). The FairValue

Leisure are shown below:

Key Ratios FairValue Leisure

Operating Profit/Operating Assets 114.92

Operating Profit/Sales 83

Sales/Operating Assets 1.28

Expenses/Sales 87.22

Sales/Fixed Assets 1.28

Sales/Current Assets 26.84

Sales/Stocks 92.35

Sales/Debtors 523.3

Current Ratio 0.99

Gearing Ratio 20
 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making6

Ans-2b)

After preparing the balance sheet and income statement of the company, we now move on to the

ratio analysis, the data used for ratio analysis will be extracted from the two financial statements

illustrated above. After computing the values, these ratios will be compared with that of the

competitor of Fairvalue Leisure, and this comparison will ultimately determine the financial

health of the organization.

The Operating Profit to Operating Assets Ratio

The Operating Profit to Operating Assets, show how much the company has earned from its

assets (Helfert, 2001, pp.48). The operating ratio of FVL turns out to be 114. 92% which can be

rounded off t 115%, on the other hand the operation ratio of its competitor is 21.28%, this is a

huge difference which proves that FVL is earning way much better than its competitor.

Operating Profit to Sales Ratio

Operating Profit to Sales ratio indicates that how much of the operating profit is generated from

the sales which the company makes. The value of this ratio for FVL is 83% which is much more

than that of its competitor, indicating a good performance of FVL. This ratio attracts investors

because it indicates the competencies of a firm in making its sales (Edwards, n.d.).

Sales to Operating Assets Ratio

Sales to Operating assets ratio indicates that how much of the sales target is attained by the

organization with the help of its operating assets (Tracy, 2009). This ratio of Field Park indicates

a value of 2.80% while the same ratio has a value of 1.28% for FVL. It means our chosen
 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making7

company has produced less from its operating assets as compared to its competitors. The

company has to increase this ratio for their long term survival.

Sales to Fixed Asset Ratio

The sales to fixed asset ratio indicates that FVL’s competitor Field Park is performing much

better in this area as compared to FVL and in order to have a sustainable future the company will

have to increase this ratio by introduce assets which will assist them in their long run.

Sales to Current Asset Ratio

Looking at the sales to current asset ratio, the ratio it was revealed that in this area also, the

competitor of the company is performing well. The sales to current asset ratio of Field Park is

34.15% as compared to the ratio of FVL which is 26.84. From this analysis, the analyst have

found that the company is not able to use its fixed as well as operating assets to generate sales

and revenues which is not a positive sign for the company indeed.

Expense to Sales Ratio

This particular ratio indicates that how much the company expense out to generate 1$ of sales,

this particular ratio should be low to be considered as the good financial indicator of a company.

It can be seen that the Expense to Sales ratio of FVL is 87.22% as compared to the ratio of Field

Park’s which is 92.40%. It means FLV expense out 87 cents for every 1$ of sales while Field

Park expense out 92 cents. This 5 cents difference determines that FLV effectively manages its

expenses, which will obviously attract a number of investors.

 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making8

Sales/Stock Ratio

It is a way to determine the relation between the stock that a company possesses as compared to

how much merchandise the company sells. The lower the sales/stock ratio is, the better it is for

the company. The Sales/Stock of FVL is 92.35% whereas the sales/stock ratio of Field Park is

203% which means that FVL is performing much better than Field Park.

Sales/Debtor Ratio

This ratio determines the percentage of credit which the company gives on its sales. The

Sales/Debtor Ratio of FVL is 523.3; on the other hand the same ratio of Field Park is 118%. This

means FVL is lagging behind because it has a higher percentage of credit which it gives to the

customers on sales, this situation, if not rectified, could lead to severe business damages in the

future.

Current Ratio

The current ratio is used for identifying the short term solvency of the fir. It is used to identify

whether the company can meet its short term debt obligations from its current assets or not. It is

generally believed that the higher the current ratio of the firm, the better in position it is

considered as compared to the competing organizations. The current ratio of Field Park Co. is

1.40 whereas the current ratio of FVL is 0.99. This indicates that Field Park Co. has a higher

tendency to pay off its short term liabilities from the current assets as compared to the tendency

of FVL. This lower current ratio of the latter, indicates that the company, does not have the

maximum capacity to meet its short term debt obligations, and that the company’s current assets
 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making9

are not sufficient to cover the current liabilities, hence, this seems to put the company in a

somewhat critical condition.

Moreover, the current ratio is all about having the assets that can be quickly converted into cash,

whenever it is needed. Investors need to understand this and should consider all the current assets

of the firm to analyze the firm’s performance. Here the current ratio of Field Park Co clearly

indicates that the company has current assets that worth more than the current assets of FVL.

Gearing Ratio

The Gearing ratio is generally defined as a measure to compare some of the owner’s equity with

borrowed money. It usually determines the extent to which an organization’s activities are

financed by owner’s and debtor’s funds. It is also known as Net Gearing Ratio. The higher a

company’s degrees of financial leverage, the higher degree of risks are associated with it

(Investopedia, n.d.). From the analysis, the researcher have found that Field Park is more risky

than FVL because the gearing ratio of Field Park is comparatively high than FVL. The gearing

ratio of Field Park is 25% while this particular ratio of FVL is 20% below than Field Park; it

means the investors have a good chance to park their money in this company because of its low

risk.

Ans-3)

Profitability is the thing that all the companies have emphasized a lot. All the companies

will work for profit maximization and to increase the shareholder’s wealth. Looking at the chart,

one can see that Central Pool earned a net profit of £ 19,000 with revenue of £ 1,350,000. On the

other hand, Taff View Pool earned a net profit of £ 180,000 with revenue of £ 1570,000. Clearly,
 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making10

it can be seen that the revenue of Central Pool is relatively lower than Taff View Pool. Central

Pool has to work hard to increase its revenue.

It has also been seen from the analysis that the total expenses of Central Pool are very high as

compared to Taff View Pool. The Expense to Sales ratio of Central Pool is 98.59%, which means

the company has spent almost 99 cents from every $1 of sales. This is so high that it must be

decreased in order to earn a substantial profit like Taff View Pool. The expense ratio of Taff

View Pool is 82.9%, which is relatively lower than Central Pool. This is the main thing that

enables Taff View Pool to earn more profit than Central Pool.

To increase the profitability of the firm, the management of Central Pool should minimize the

credit which it gives on sales to the customers, since the percentage of credit given is very high;

it affects the profitability of the organization. Moreover, the company should have a robust

inventory management so as to avoid inventory pile ups which also decrease the profitability of

the firm. Cost effective solutions will help the company in true manners, to achieve the goal of

higher profitability (Weygandt, Kimmel and Kieso, 2009).

Ans-4) Sources of Finance

Since it is very important to have significant amount of finances while a company plans to

expand its business, the company makes a tradeoff of costs and benefits to make such financial

decisions. At the bottom line, there are usually two sources of finances; external and internal.

The external sources include those which are outside the enterprise, for instance, banks,

corporate securities etc., on the other hand, internal sources include those which are within the

enterprise and can be used for generating finances, for instance, sales of assets, retained earnings,
 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making11

etc. In this section the possible external sources of finances available to FVL for the expansion

to fitness clubs will be discussed.

External Sources of Finance

a) Long-Term Loans from Commercial Banks: The company can take long term loans from

commercial banks. Since these institutions can provide huge amount of funds, just by

giving a collateral security, for instance, mortgaging an asset, it would be useful for the

company because it no longer wants to have the assets associated with Center of Taff

View Polls, and those assets could be given to the bank as mortgage.

Advantages

• The advantage is that the company does not have to put its own money into the

business.

• Long term loans allow organizations to grow financially as a result of upfront

investment (Glynn, Murphy, Perinn and Abraham, 2003).

• Since these loans are flexible, the accommodate changes in the organizational

budgets, occurring due to any unexpected situation.

Disadvantages

• The company has to pay a large fee in the form of interest to the bank for using its

money to strengthen a company’s operations.

• The liability and revenue recognition issues for the company will be minimal if they

exercise the loan facility from a bank (Sofat and Hiro, 2008).
 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making12

b) Public Deposits: This is an innovative way or generating funds for the organization. The

time period of a public deposit is a minimum of 1 year and maximum 5 years, in this the

public may be asked deposit their money with the organization for s specific time period.

For the money which public invests, organization pays interest and returns the deposited

money to them upon maturity.

Advantages

• The advantages of public deposits include; lower costs for meeting day to day

operational requirement.

• It’s a simple and safe procedure which is convenient for the organizations and above

all, it involves the payment of a fixed amount of interest, unlike the way it happens in

commercial banks.

• It is a risk-free source of finance since the government recommends appropriate

procedures and accountability of the investors as well as he organizations

Disadvantages

• The company making or issuing public deposits has to follow strict guidelines set up

by the government.

• It is not easier for newly established organizations to get these public deposits, unlike

the renowned organizations.

• The public deposits have a short maturity period (Shim and Segal, 2008).
 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making13

c) Equity Shares: The equity share represents a shareholder’s ownership in the organization.

Whenever a firm is in dire need of capital or money to operate, these equity shares are

sold in the market upon, simply put, the company sell these shares for a price and these

shares represents ownership in the company for the purchaser. Upon selling, the company

gives the right profit sharing to the purchaser. The shareholders, in a way, invest in the

company by purchasing the shares, as their shares generate return in the form of

dividends. In a nut shell, these shares are a complete source of capital for the firm. Like

other sources of finance, equity shares also have some advantages and disadvantages.

Advantages

• Huge amount of capital could be raised, but within the share capital limits set by

SEBI.

• No legal binding, as the company do not have to pay dividend returns to shareholders

at different intervals of time.

• Moreover, the company has available choices for sharing profits, for instance, the

company can give either retained or accumulated profits.

Disadvantages

• Dilution of control, because the share-holders also participate in the decision making

process, and a number of decisions arises which sometimes lead to conflicts.

• In addition to this, the inefficient use of these equity shares may lead to under-utilized

funds, which ultimately affects the financial health of the organization (Verinmen,

2000).
 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making14

Ans-5) Introducing Budgetary Planning and Control System

Since, there are loop holes in the current financial management of the organization, we will now

discuss, the implications of introducing a budgetary planning and control system within the

organization, so as to have more robust management of finances.

The budgetary control system, if introduced, will provide the company with following benefits:

• The system of budgetary planning and control will compel the management to think

about future prospects, and look ahead to set out detailed plans for achieving the targets,

related to different departments, simultaneously, compelling each manager to give the

organization a specific direction to move on (Drury, 2001).

• It will clearly define the responsibilities, making the managers of budget centers

responsible of achievement of budget targets for operations.

• It will provide a basis for the analysis of organization’s financial performance, i.e.

variance analysis, hence, deviations made from the budget can be investigated and

reasons of the deviations could be identified, further dividable into controllable and non-

controllable variances.

• It will improve the allocation of scarce resources.

• Using the approach of management by principle, this system will facilitate time

management (Kumar, 2010).

Conclusion

After the entire analysis, it can be concluded that Fairvalue Leisure needs to change a lot of its

operations, in order to have a sustainable future in the global marketplace. The company has to
 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making15

lower a few of its expenses, whereas, in some other areas the company needs to pay more

attention, for instance, towards its current liabilities, and sales. The prospect of implementing a

budgetary planning and control system will increase the efficiency of the management in

managing the finances of the organization and if ran successfully, the new project will also turn

out to be a great success.

References
Brigham, E., and Ehrhardt, M., (2008), Financial Management: Theory and Practice, Cengage

Learning.

Brigham, E., and Houston, J., (2007), Fundamentals of Financial Management, Cengage Learning.

Drury C., (2001), Management Accounting for Business Decision, Thompson International

Publishing, London.

Edwards, H. (n.d.), Accounting Principles, Edition: 8, Free lod Press, Inc.

Glynn, J., Murphy, M., Perrin, J., and Abraham, A., (2003), Accounting for Managers, Thomson

International Publishing, London.

Investopedia, (n.d.), Gearing Ratio, Retrieved Dec 23, 2010, from,

http://www.investopedia.com/terms/g/gearingratio.asp

Kumar, V. (2010), Accounting for Management, Tata McGraw-Hills.

Sofat, R., and Hiro, P., (2008), Basic Accounting, Retrieved, Dec 23, 2010, from,

http://books.google.com.pk/books?

id=pKA9ytS1n20C&pg=PA326&dq=three+possible+sources+of+finance+for+the+organis

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 Accounting Business Report with Calculation in Strategic Accounting for Decision-Making16

m=6&ved=0CEEQ6AEwBQ#v=snippet&q=sources%20of%20finance&f=false

Shim, J, and Segal, J., (2008), Financial Management, Barron’s Educational Series.

Tracy, J. (2009), How to read a Financial Report, John Wiley & Sons.

Weygandt, J., Kimmel, P., and Kieso, D. (2009), Financial Accounting, John Wiley and Sons.