School of Accountancy
Accounting
This assignment will be marked out of 45.
INSTRUCTIONS
How to Approach this Assignment
• Please read all instructions before starting the assignment.
• You should first study the relevant material in the text and make sure you understand the concepts covered.
• Download the Assignment Answer Booklet to answer assignment.(No other file will be accepted for marking.)
Backups
Once you have started working on an assignment you should make backups. It pays to rename different versions of your work. A simple way to do this is to use the Save as file instruction and add a number or letter to the end of the file name. (This allows you to go back to an earlier version.)
ASSIGNMENT BRIEF
The Joythi family are the owners of Jayam Ltd, a medium sized company dealing in crockery. Upon the death of their father a year ago, the older brother Paran took over as the managing director, but some of the family are concerned with the current performance of the business. They have been doing some investigating and they produce a table showing the industry and previous year’s ratiostogether with industry averages for 2016 (refer Appendix A). Jayam Ltd ‘s comparative financial statements for the years ended 31 March 2016 and 2015 are provided below.
Note: Analysis ratios for use with the Cunningham textbook are listed in Appendix B
Jayam Limited
Comparative Statement of Financial Performance
for the year ended 31 March 2016
2016 2015
$’000 $’000
Sales (all on credit) 4,200 4,500
Cost of Goods Sold 2,940 3,000
Gross Profit 1,260 1,500
Selling Expenses 305 256
Administration Expenses 487 501
Interest 142 135
934 892
Net Profit before Tax 326 608
Income Tax Expenses 114 201
Net Profit after Tax 212 407
Dividends 300 300
Retained Earnings (88) 107
Jayam Limited
Comparative Statement of Financial Position as at 31 March 2016
2016 2015
$’000 $’000
Shareholders’ Funds
Contributed Share Capital 3,000 3,000
Retained earnings 1,568 1,656
4,568 4,656
Represented by:
Current Assets
Bank 35 165
Marketable Securities 126 134
Accounts Receivable 441 595
Inventory 790 613
Prepaid Expenses 56 62
1,448 1,569
Current Liabilities
Bank Loan (Current Portion) 170 170
Accounts Payable 655 489
Accrued expenses 89 78
914 737
Working Capital 534 832
Non-current assets
Equipment 1,449 1,667
Property 3,421 3,169
4,870 4,836
Less Long Term Liabilities
Term Loan 836 1,012
Net Assets 4,568 4,656
Required:
a) Complete the ratio analysis figures for the 2016 in the template in your Assignment 2 Answer booklet. (11 marks)
b) Report
You are required to write a report to the Joythi family on the financial performance of Jayam Ltd. in 2016 and the financial position at year end. You should base your report on the financial statements, the ratios for the two years and the selected industry averages.
Your discussion should focus on the following areas:
(i) Return on Owners’ Equity (5 marks)
(ii) Operating Performance (10 marks)
(iii) Liquidity and Financial Flexibility (6 marks)
Your conclusion should identify two significant problem areas at Jayam Ltd. and advise what action should be taken by management to address the problems identified. (8 marks)
Report Format (5marks)
Note: Appendix 2 of the Course Guide gives guidelines for writing a report
Total Marks [45 marks]
Appendix A):RATIOS AND INDUSTRY AVERAGES (2016 ANALYSIS RATIOS TO BE COMPLETED IN YOUR ANSWER BOOKLET)
2016 2015 Industry Averages
Debt Ratio
27%
40%
Current Ratio
2.13:1
2:1
Quick Ratio
1.21:1
1:1
Return on Owners’ Equity
9%
10%
Return on Total Assets
10%
8%
Inventory Turnover
5.51x
or 66 days
5 x
or 73 days
Accounts Receivable Turnover
7.86 x
or 47 days
8 x
or 46 days
Gross Profit Percentage
33%
32%
Profit margin
9%
10%
APPENDIX B):ANALYSIS RATIOS FOR USE WITH CUNNINGHAM
TYPE OF RATIO REFERENCE
PROFITABILITY Chapter/ Page
1 Profit Margin Ch. 7 p.293 (280) Net Income after tax x 100
Net Sales
2 Gross Profit Percentage Ch. 7 p.293 (281) Gross Profit x 100
Net Sales
3 Return on Total Assets Ch.8 p.343 (323) (Net Income + Interest Expense) x 100
Average Total Assets
4 Return on Owner’s Equity Ch.8 p.324 (344) Net Income x 100
Average Owner’s Equity
EFFICIENCY
5 Inventory Turnover Ch. 8 p.326 (345) Cost of Goods Sold
Average Inventory
6 Number of Days in Selling Period Ch. 8 p.327 (346) 365
Inventory Turnover7 Accounts Receivable Turnover Ch. 8 p.327 (347) Net Credit Sales
Average Accounts Receivable
8 Number of Days in Collection Period Ch.8 p.328 (347) 365
Accounts Receivable Turnover
LIQUIDITY
9 Current Ratio Ch. 8 p.337 (318) Current Assets
Current Liabilities
10 Quick Ratio Ch.8 p.338 (318) Quick Assets
Current Liabilities
Where Quick Assets = Cash + Accounts Receivable + Short Term Marketable Securities + Short Term Notes Receivable
FINANCIAL GEARING
11 Debt Ratio Ch. 8 p.339 (320) Total Liabilities x 100
Total Assets
12 Interest Coverage Not in text Net Income + Interest Expense
Interest Expense
OTHER
13 Sales % Increase Not in text (Sales Year 2 – Sales Year 1) x 100
Sales Year 1
Marking Criteria
This will give guidance in preparing your report.