Helena Beauty Financial Analysis Report

This assignment delves into a detailed financial analysis of Helena Beauty. It examines the company's financial statements, focusing on cash flow budgets, statements of cash flows, and profitability metrics. The report also analyzes the impact of debt on Helena Beauty's financial health, highlighting the interest payments associated with borrowing. The ultimate goal is to assess Helena Beauty's financial performance in 2016 and identify areas for potential improvement.

ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1..................................................................................................................................1
QUESTION 2..................................................................................................................................3
QUESTION 3..................................................................................................................................4
QUESTION 4..................................................................................................................................5
a. Calculating the variable cost per pot........................................................................................5
b. Contribution margin per pot.....................................................................................................6
c. Calculating break-even point...................................................................................................6
d. Assessing whether company should accept or reject the order................................................6
e. Giving conclusion....................................................................................................................7
f. Calculating profit or loss for the month of May.......................................................................7
QUESTION 5..................................................................................................................................8
Preparing a price quotation..........................................................................................................8
QUESTION 6..................................................................................................................................9
a. Assessing the factors that influence the decision making of organization in relation to
holding cash within the business..................................................................................................9
b. Assessing the cost which business unit will incur on the holding of too low level of
inventory......................................................................................................................................9
C. Explain the pros and cons of retained profit source of finance.............................................10
d. Presenting the financial information that a venture capitalists needs to consider when
evaluating investment opportunities..........................................................................................10
CONCLUSION..............................................................................................................................11
REFERNCES.................................................................................................................................12

INTRODUCTION
Accounting is a broad concept which is primarily concerned with
reporting and examining organizational performance for the decisive
business decisions. The current report emphasizes on various financial and
management accounting practices i.e. financial reports, ratio analysis,
budgeting, source of finance, cost calculation and others for the future
growth.
QUESTION 1
(A) Financial accounting collect, gather, organize and report only the result
of financial business activities whereas management accounting deals with
examining both the financial as well as non-financial business performance
for the decisive plans and decisions. Financial accounting reports only
provides quantitative information, for instance, P&L account reports
expenditures and income to reflect net profit whilst balance sheet provides
detail of assets and liabilities to know financial status of the firm (Edwards,
2013). In contrast, in the management accounts, receivable reports not only
inform just the outstanding debt but also inform about the due date, default
in payment and others helps in rationalized credit decisions. On the other
hand, operational reports present target set and actual result of the business
function so that management can compare both and make smart decision.
(B)
(i) Equity/ordinary shareholders are the owners of a public company. They
gain ownership by investing in the firm’s shares and getting voting rights in
the board decisions.
(ii) Lenders, venture capitalists, suppliers, consumers, employees, public,
competitor, taxation authorities and other stakeholders (Gassen, 2014)
(C)
a) Paid up capital: Equity
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b) Bank Loan: Liability
c) Provision for annual leave: Liability
d) Brand names and intellectual property: Assets
e) Accounts receivables: Assets
f) Prepaid insurance premium: Assets
g) Deposits paid by a consumer for work yet to be done: Liability
h) Retained profit: equity
(D)
 Statement of Cash flow (SOCF) reflects change in cash balance at two
different balance sheet date however, cash budget demonstrate
whether company will have surplus or deficit of cash.
 SOCF present the actual cash inflow & outflow from operational,
financing and investing activities whilst cash budget just provides
estimated result to assess future cash (Peavler, 2016).
 SOCF is prepared yearly by complying with the accounting & reporting
rules like IAS & IFRS, however, cash budget is constructed for shorter
period i.e. quarterly, semi-annually without any legal obligation.
(E) Depreciation means reduction in the assets value over the time due to its
use in the business. It either can be charged following fixed method or
written down value (WDV) method. For instance, an assets at $100,000 has
been bought and estimated life is 5 year, then annual depreciation worth
($100,000/5) = $20,000 will be charged so as to reflect true value of assets
every year.
(F)
Pair Larger Reason
EBIT & Net Profit EBIT EBIT reflect profit before interest and tax
whereas net profit indicates return after
subtracting both interest and tax amount.
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Paid up capital
and owners
equity
Owner’s
equity
Owners equity is the sum of paid up
capital plus reserves and surplus; hence, it
is always greater.
Dividend per
share and
Earning per
share
EPS EPS is greater than DPS because dividend
is distributed out of net earnings of the
firm (Zeff, 2016).
Current assets
and current
liabilities
Current
assets
Every establishment need sufficient
quantity of current assets so as to finance
their short-term liabilities like payables
and others.
Net profit and
gross profit
Gross profit GP is the surplus of sales over cost of
goods sold whereas NP is determined by
subtracting all the other expenditures
from the gross profit, therefore, it is
comparatively lower than GP.
QUESTION 2
(A)
 Issue of share will increase equity whereas its redemption will result in
decline.
 Use of retained earnings to finance the business capital requirement
will decrease owner’s equity; however, generating more profit will
maximize it (Gassen and Schwedler, 2010).
 Revaluation of assets creates revaluation reserve which is considered
as the part of owner’s equity, therefore, increase or decrease in such
reserve affects equity accordingly.
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 Creating distributable reserve like general reserve will give rise to
equity whilst its use will decrease the equity balance.
(B)
 To have enough funds to meet sudden capital requirement and to
prevent the business against market uncertainties
 To encourage investors to invest funds in the business and if owner will
withdraw and indicate zero balance, then none of the investor will be
ready to take risk (Waegenaere, Sansing and Wielhouwer, 2015)
 To satisfy all the stakeholders like fund providers, suppliers, employees
and others that business is profitable
(C)
Although debt is a cheaper financial source because of the presence of
tax shields, still, there are some consequences of it that affects financial
position, enlisted below:
 Borrowing excessive funds from bank bring legal requirement for the
entity to pay instalments periodically and affects net profit
 In case of inadequate return due to market externalities, firm will not
be able to meet their debt obligation, in such case, it affects market
reputation adversely.
 High gearing results in poor long-term solvency as a result, company
might be unable to pay instalments inclusive of interest on time to the
lenders and may goes into bankruptcy
(D)
Reasons for negative operating cash flow
 Decline in sales
 High cost of sale
 High operational expenditures
 Increase in current assets i.e. inventory, receivables and others
 Decrease in current liabilities i.e. payable
It is necessary for the managerial team of the enterprise to keep track
over daily activities and identify the reasons behind cost overrun and
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decreasing revenues. They must took cost cutting decisions and monitor
staff activities to minimize the possibility of exceeding expenditures and also
make plans for the revenue maximization, so that, entity will have surplus
cash available to finance operations (Waegenaere, Sansing and Wielhouwer,
2015).
QUESTION 3
(A)
Ratio Formula 2015 2016
Net profit
Sales - cost of sale - all other
expense 9000 6000
Sales 60000 90000
Net profit margin (Net profit/total sales)*100 15.00% 6.67%
Net profit 9000 6000
Average
Shareholder’s equity 58000 66000
Return on equity
(ROE)
Net profit/Average Shareholder’s
equity*100 15.52% 9.09%
Current assets
Inventory + accounts receivables
+ cash at bank (Dr) 42000 63000
Current liabilities
Accounts payable + Cash at bank
(Cr) 6000 27000
Current ratio Current assets/current liabilities 7.00 2.33
Inventory 18000 33000
Acid test ratio
(Current
assets-inventory)/current
liabilities 4.00 1.11
Long-term debt 0 12000
Shareholder’s equity 60000 72000
Gearing ratio (Long-term debt /equity) 0.00 0.17
Average inventory (Opening + Closing)/2 16500 25500
Inventory turnover
ratio Sales/Average Inventory 3.64 3.53
(B)
Profitability: In 2016, Helena Beauty’s net profit margin dropped
from 15% to 6.67% which clearly reflects poor performance because YOY
growth in sales is reported to 50% whereas; cost of sales gone up by
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61.54%. It may be due to sudden increase in supplier’s charges due to
shortage of supply and high transportation cost. In contrast, inventory
turnover ratio reflects ineffective use of stock to generate sales as it decline
from 3.64 times to 3.53 times. Besides this, operational expenses have been
increased by 75% because of poor monitoring and lack of supervision (Beatty
and Liao, 2014). Due to decrease in net earnings, ROE also came down from
15.52% to 9.09% reflects that firm did not earn good return on equity
invested.
Liquidity: Current ratio resulted down from 7:1 to 2.33:1 and acid test
ratio dropped from 4:1 to 1.11:1 in FY 2016. Although decline ratio indicates
liquidity decrease, still, the ratio is above than industrial benchmark of 2:1
and 1:1, therefore, it can be interpreted that Helena Beauty has sound
liquidity management to pay deferral short-term obligations timely (Zeff,
2016).
Long-term solvency: In 2015, business was financed only through
Helena’s own capital of $60,000 at no debt. However, in following year, firm
had taken a loan amounting to $12,000 in its capital structure which increase
gearing ratio to 0.17. The ratio reflects that financial risk is too low, as
company preferred equity as a main source of capital. Debt/equity ratio is far
below than idle ratio of 0.50:1 which encourage firm to borrow more capital
so as to take tax and trading on equity benefits.
QUESTION 4
a. Calculating the variable cost per pot
Particulars
Fancy Terracotta
pots per unit Figures
(in $)
Selling price 4.8
Plastic raw material 1.5
Electricity 1.4
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Machine operator labour 1
Transport and distribution 0.4
Total variable cost 4.3
Fixed cost
Fancy Terracotta
pots Figures (in $)
Plain Black pots
Figures (in $)
Rent on premises 1000 1000
Managers salary 2500 2500
Total fixed cost 3500 3500
b. Contribution margin per pot
Computation of contribution
Particulars Fancy Terracotta pots (in $)
Selling price 4.8
Variable cost per unit 3.44
Contribution per fancy pot (Selling price per unit –
variable cost per unit) (Kaplan and Atkinson, 2015) 1.36
c. Calculating break-even point
Particulars Figures (in $) Figures (in $)
Total fixed cost 3500 3500
Contribution when variable cost is $1.95 2.8 – 1.95 = 0.85
BEP (Fixed cost / contribution per
unit) (Morgan and et.al., 2015) 4118
The above depicted table presents that firm will attain the position of no profit no loss by
making and offering 4118 pots to the customers.
d. Assessing whether company should accept or reject the order
On the basis of cited case situation, in the case of large order such as 2000 plain pots firm
will charge $1.90 per pot as selling price. In this, it is not required for the business unit to incur
transportation and distribution cost such as $.40 per pot. However, normal selling price per pot is
$2.80, in this, if firm will not incur transportation cost then it accounts for $2.40. By taking into
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account such aspect, it can be said that firm should reject the order because it will directly
influence the profit margin of firm.
e. Giving conclusion
From assessment, it has been found that company should accept the order only when
selling price is equal to and higher than $2.4 per pot. Moreover, in the case of selling plain pots
below such price level firm will incur loss that is not good.
f. Calculating profit or loss for the month of May
Profit assessment
Particul
ars
Fancy
Terraco
tta pots
(900
pots)
Plai
n
Blac
k
pots
(170
0
pots
)
Total
Costs
7370 681
5
Sales
revenue
4320 476
0
Profit
(Cost –
sales)
(Otley
and
Emmanu
el, 2013)
3050 205
5
The above depicted table show that if business entity will make 900 fancy pots then profit
margin accounts for $3050 respectively. On the other side, in the case of making 1700 pain pots
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profit will be $2055 significantly. Thus, it can be said that small manufacturing business will
attain higher margin by making 1700 plain pots.
QUESTION 5
Preparing a price quotation
Computation of manufacturing overhead
Particulars
Figures
(in $)
Budgeted machine
hours 2800
Manufacturing
overhead 124600
Per machine hour rate 44.5
Computation of administrative overhead
Particulars
Figures
(in $)
Budgeted labor hours 5600
Administrative
overhead 144900
Per machine hour rate 25.87
Computation of profit %
Profit = 171,500
Total cost = 514,500
Profit % = 171,500 / 514,500 * 100
= 33%
Calculation of total cost
Particulars
Figures
(in $)
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Direct materials 14000
Manufacturing
overheads 14017.5
Administrative
overheads 16301.25
Total costs 44318.75
Profit before tax 14772.92
Price
59091.67
From assessment, it has been identified that price quotation for Job no 43 accounts for
$59091.67 respectively.
QUESTION 6
a. Assessing the factors that influence the decision making of organization in
relation to holding cash within the business
From assessment, it has been identified that there are several factors that compel business
unit to hold cash such as:
 Debt level
 Management of day to day operations
 Payment to suppliers
 Tax liabilities
 Investment policies (Beatty and Liao, 2014)
b. Assessing the cost which business unit will incur on the holding of too low
level of inventory
If business unit will hold lower inventory then it has to incur following expenses which
in turn places direct impact on cost level such as:
 High freight cost pertaining to incoming and outgoing shipment
 High prices for the parts and materials
 Loosing favourable prices and discounts
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Hence, the entire depicted cost firm has to incur when it maintains the inventory level lower.
Thus, it is suggested to the firm to place emphasis on undertaking EOQ technique which in turn
ensures enough inventory level and thereby helps in getting financial benefits (Suomala, Lyly-
Yrjänäinen and Lukka, 2014).
C. Explain the pros and cons of retained profit source of finance
Retained profit may be served as an internal source of finance that provides high level of
assistance to the business organization in meeting its financial needs or requirements. Hence,
retained profit implies for the amount that business organization keep with itself. The main of
company behind retaining the profit level is to meet contingent situation more effectually. It is
one of the most effectual sources of finance that can be undertaken by the firm to enhance the
level of fund. Such source of finance has following advantages and disadvantages:
Pros: Retained profit source enables firm to fulfil monetary need without enhancing any kind
of debt obligation. In this regard, by raising funds through retained profit source company can
free itself from financial obligation like interest payment. Besides this, such source of finance
also helps company in maintaining the secrecy to a great extent. Moreover, in the case of loan
company has to provide financial institution with business documents (Advantages &
Disadvantages of Retained Profit, 2017). In addition to this, retained profit source provides high
level of assistance to the firm in stabilizing dividend payment.
Cons: When company takes decision in relation to raising fund from retained earning source
then it imposes opportunity cost in front of it. Moreover, when firm makes more use of retained
profit to fulfil the monetary requirement then it would not be in position to offer high dividend to
shareholders. This in turn closely hampers the brand image of an organization. Further, retained
profit source also imposes the possibility of over capitalization which in turn also affects the
smooth functioning of business.
d. Presenting the financial information that a venture capitalists needs to
consider when evaluating investment opportunities
At the time of making assessment of the prospective investment opportunities venture
capitalists needs to make assessment of both financial and non-financial information. Hence,
venture capitalists should make evaluation of target market, competitors, strategic framework,
skills as well as abilities of staff, uniqueness in offering and customer’s interest towards the same
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(Ward, 2012). Thus, venture capitalists should consider all such non-financial information at the
time of making assessment of investment opportunities. Moreover, customers are encouraged to
the purchase products or services from the retailer which offers innovative products at suitable
price level.
CONCLUSION
From the above report, it has been concluded that management accounting reports
provide highly detailed information to managers. Hence, by undertaking managerial reports
higher management can streamline business operations. Besides this, it can be inferred that cash
flow budget and statement of money flow varied from each other. Further, it has been articulated
that debt imposes high level of financial burden in front of company in terms of interest
payment. Along with this, it can be stated that profitability aspect or condition of Helena Beauty
was not sound in 2016. Thus, firm is required to undertake strategic action or measure that aid in
its profitability aspect.
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REFERNCES
Books and Journals
Beatty, A and Liao, S., 2014. Financial accounting in the banking industry: A review of
the empirical literature.Journal of Accounting and Economics. 58(2). pp.339-383.
Edwards, J.R., 2013. A History of Financial Accounting. Routledge.
Gassen, J and Schwedler, K., 2010. The decision usefulness of financial accounting
measurement concepts: Evidence from an online survey of professional investors and their
advisors.European Accounting Review. 19(3). pp.495-509.
Gassen, J., 2014. Causal inference in empirical archival financial accounting research.
Accounting, Organizations and Society. 39(7). pp. 535-544.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Morgan, R.O. and et.al., 2015. A break-even analysis for dementia care collaboration: Partners in
Dementia Care. Journal of general internal medicine. 30(6). pp.804-809.
Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control.
Springer.
Suomala, P., Lyly-Yrjänäinen, J. and Lukka, K., 2014. Battlefield around interventions: A
reflective analysis of conducting interventionist research in management accounting.
Management Accounting Research. 25(4). pp.304-314.
Waegenaere, A., Sansing, R. and Wielhouwer, J.L., 2015. Financial accounting effects of tax
aggressiveness: Contracting and measurement. Contemporary Accounting Research. 32(1).
pp. 223-242.
Ward, K., 2012. Strategic management accounting. Routledge.
Zeff, S.A., 2016. Forging accounting principles in five countries: A history and an analysis of
trends. Routledge.
Online
Peavler, R., 2016. Cash budget Vs Statement of Cash Flows. [Online].
Available through: https://www.thebalance.com/cash-budget-vs-flow-393122.
[Accessed on 1st August 2017].
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Advantages & Disadvantages of Retained Profit. 2017. [Online]. Available through:
<http://smallbusiness.chron.com/advantages-disadvantages-retained-profit-
13164.html>. [Accessed on 1st August 2017].
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