Financial Ratios and Analysis for ABC Ltd

This document provides an analysis of the financial ratios and liquidity of ABC Ltd. It discusses the company's current structure, break-even analysis, and allocation of overhead costs. The document also explores the impact of segmenting on cost allocation and provides insights for potential investors.

ACCOUNTING

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................1
QUESTION 2...................................................................................................................................3
QUESTION 3...................................................................................................................................6
REFERENCES................................................................................................................................9

QUESTION 1
a) Calculations of Financial Ratios of Abc Ltd
Liquidity
2019 2018 Change
Current
Ratio Current Assets
£11,674.0
0
£10,990.0
0
Current
Liabilities
£11,572.0
0
£10,378.0
0 1.01 1.06 -4.74%
Quick Ratio
CA -
Inventories £9,055.00 £9,142.00
Current
Liabilities
£11,572.0
0
£10,378.0
0 0.78 0.88 -11.17%
Solvency
2019 2018 Change
Debt Ratio Total Liability
£25,187.0
0
£21,323.0
0
Total Assets
£31,634.0
0
£27,266.0
0 79.62% 78.20% 1.81%
Leverage
Ratio Total Assets
£31,634.0
0
£27,266.0
0 4.91 4.59 6.95%
Total Equity £6,447.00 £5,943.00
Gearing
Interest bearing
debt £5,800.00 £4,160.00
IBD + Equity
£12,247.0
0
£10,103.0
0 47.36% 41.18% 15.02%
B. Comments over liquidity and financial stability of company.
The liquidity and financial stability of company is very important to be identified before
investing in any company. The financial ratio is a method used by investors to identify the
position and financial health of company.
Liquidity ration are calculated for identifying the financial liquidity strength of company.
If the company has no financial liquidity than it may have to suffer losses (Singh and Singh,
2018). The liquidity is measured by current and acid ratio of company. The current ratio of
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company is 1.01 in 2019 and 1.6 in 2018. There has been a decline of 4.06% in the current ration
of company from last year. The current ratio has gone down due to sale of marketable securities
and current maturity of long term debt. This shows the ability of company to repay its short term
obligations with the available resources. The industry trend of current ratio is 1.7 where of
company is 1.01. The difference is not very wide therefore it could not be said that position of
company is weak. It was having current ratio near to standard last year.
Quick ratio of company is 0.78 and it has shown a decline of 11.17%. This ratio
represent liquidity position excluding the inventory. The inventory is higher than last year
therefore the decline is also higher than current ratio. Industry standard is 1 where of company is
below average. The liquidity position of company has to be strengthened using appropriates
strategies. It should write off unnecessary provisions for improving the liquidity position of
company. Major decline in the liquidity position is seen because of the long term debts that are
having current maturity (Pai and Dam ,2017). The stakeholders are influenced by the liquidity
position of company therefore it is important to have strong liquidity position.
Solvency ratios are used by investors and users of financial statements for identifying
ability of company to meet the debt obligations. Solvency ratio is used for identifying whether
the company is having sufficient cash flows for meeting the short and the long term liabilities.
For identifying the solvency of company debt and financial leverage is used by the investors.
The debt ratio of company against total assets identifies the assets that are financed by creditors.
It shows the ratio of company is 79.62% where the industry average is 60%. The ratio is higher
than the industry average. This shows that company have raised comparatively higher loans than
its competitors. Company has 20% higher debts which means company uses more of the debts
funds to carry out its business operations. Company has raised more loans this year against its
assets. Also the company is having outstanding payroll for the year.
Leverage ratio of company is used for identifying the debts of company against its debts.
Leverage ratio is also higher at 4.91 than the industry average of 2.5. As against equity also
company has higher debts. Company can raise funds through equity sources for improving the
leverage structure of company (Hałaj and Henry, 2017). Total long term liabilities have raised of
company from last year. Higher debts will increase the costs of company reducing the profits.
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c) As a potential investor it could be seen that the financial health of company is not strong.
Company has already raised high loans for funding the operation of company. The liquidity
position of company is below the industry average. It do not high liquidity position for repaying
the debts. The solvency of company is also at higher risks. The financial leverage is high.
Raising loans will further increase the financial risks. Company may not be able to repay the
interest charges on its respective due dates. On the other hand if the profitability of company is
higher than the industry average than the investment could be made in unsecured notes
(Suprihati, Romdhoni and AM, 2018). As it may be possible company is growing therefore has
raised loans for carrying out its further operations.
QUESTION 2
Current structure of company.
Current Structure
Sales (units) 20000
Selling price 130 2600000
Var. Manufacturing
Cost 50 1000000
Fixed Manufacturing
Cost 20 400000
Contribution 60 1200000
Variable Sel. & Admn.
Cost 30 600000
Fixed Sel. & Admn.
Cost 15 300000
Net Profit 15 300000
Suggestion 1
Jim Jackson
Sales (units) 20000
Selling price 140 2800000
Var. Manufacturing
Cost 50 1000000
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Fixed Manufacturing
Cost 20 400000
Contribution 70 1400000
Variable Sel. & Admn.
Cost 30 600000
Fixed Sel. & Admn.
Cost 21.25 425000
Net Profit 18.75 375000
Adopting the suggestion of Jim Jackson the per unit cost of company would be increased
to 140 and the net profit per product will also increase to $18.75 from $15. The suggestion will
only increase the advertisement cost of $ 125000 where the increase in profit is of only $75000.
Suggestion 2
Tim Walter
Sales (units)
(25%
increase) 25000
Selling price 130 3250000
Var. Manufacturing
Cost 55 1375000
Fixed Manufacturing
Cost 16 400000
Contribution 59 1475000
Variable Sel. & Admn.
Cost 30 750000
Fixed Sel. & Admn.
Cost 14 350000
Net Profit 15 375000
Tim Walter suggests of increasing the number of units by 25%. It also includes spending
of $ 50000 on the advertisement campaign and increase in variable cost by $5 amounting to
$125000. The total increase in costs is of $ 175000 where the profit margin in total and per unit
will remain to current level.
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Suggestion 3
Sandy Smith
Sales (units) 24000
Selling price 120 2880000
Var. Manufacturing
Cost 50 1200000
Fixed Manufacturing
Cost 16.67 400000
Contribution 53.33 1280000
Variable Sel. & Admn.
Cost 30 720000
Fixed Sel. & Admn.
Cost 14.17 340000
Net Profit 9.17 220000
Sandy Smith suggests of offering rebate of $ 10 that will increase the sales level by 4000
units with an additional campaign cost of $40000. This suggestion also involves costs higher
than the returns and also the per unit profit of product is reduced.
Break Even Analysis
Break even point = Fixed Cost / Contribution per Unit
Particular Current Jim Tim Sandy
Fixed Cost 400000 400000 400000 400000
Revenue 130 140 130 120
Variable cost per unit 50 50 55 50
Contribution 80 90 75 70
Break even (units) 5000 4444 5333 5714
Sales price 130 140 130 120
Break even in $ 650000 622222.2 693333.3 685714.3
The Break-even point also suggests that cost will be recovered fastest under the
suggestion given by Jim. Suggestion of Jim should be adopted as the per unit profit of product is
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increased and also company could recover its cost earliest at level of 130 units. Increasing the
production will further increase the over all profit for recovering the cost.
QUESTION 3
a.
On labour
hours Total Overhead $ 98,400.00
Total Direct
labour hours 25795
Allocation
Rate $3.81
Particulars Amount
Direct labour hours per
product 25795
Overhead rate per direct
labour hour 3.81
Overhead assign per
product 98278.95
Number of units 350
Overhead per unit 280.797
b.
Total Cost of the special order
Particulars Total Cost
Direct materials $ 193,200.00
Direct labour $ 327,600.00
Overheads $ 98,400.00
(On Labour
hours)
Total Cost $ 619,200.00
c.
On machine
hours Total Overhead $ 98,400.00
Total machine
hours 9840
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Allocation Rate $10.00
Particulars Amount
Direct machine hours per
product 25795
Overhead rate per direct
labour hour 10
Overhead assign per
product 257950
Number of units 350
Overhead per unit 737
Total Cost of the special order
Particulars Total Cost Per unit Cost
Direct materials $ 193,200.00 $ 552.00
Direct labour $ 327,600.00 $ 936.00
Overheads $ 98,400.00 $ 737.00
(On machine hours)
Total Cost $ 619,200.00 $ 2,225.00
d.
Abc ltd could adopt the minimum price of trailer based on the labour intensive hours is $1768.
Particulars Total Cost Per unit Cost
Direct materials $ 193,200.00 $ 552.00
Direct labour $ 327,600.00 $ 936.00
Overheads $ 98,400.00 $ 280.80
(On Labour hours)
Total Cost $ 619,200.00 $ 1,768.80
e)
Segmenting helps in allocating the overhead cost to individual jobs and activities. It
refers to apportionment of the indirect costs to the goods produced. There are many business
where cost of overheads which is to be allocated is higher than the direct costs of goods,
therefore segmenting is important for allocating the costs. Goal is of allocating the
manufacturing the overhead cost jobs which are based over common activity like machine hours,
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direct labour hours or direct labour costs. Activity used for allocating the manufacturing
overhead cost to jobs is known as allocation base. After selecting the allocation base overhead
rate could be established. The allocation is important so that individual task can have its separate
cost. Allocations is important as it impacts directly the income statements and balance sheet of
the business (Leśniak and Juszczyk, 2018). The accounting systems guides to allocate cost
incurred in manufacturing the products in a company. Segmenting helps in assigning the cost to
activities and jobs so that profit and cost of each task could be identified. Beyond accounting
requirement it also helps in making decisions for the company.
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REFERENCES
Books and Journals
Singh, S. and Singh, O.P., 2018. Liquidity and solvency performance of tata steel limited and
sail: A comparative study. ZENITH International Journal of Business Economics &
Management Research 8(8). pp.67-79.
Pai, M.G.S. and Dam, L., 2017. PREDICTIVE ABILITY OF RELATIVE SOLVENCY RATIO
FOR ASSESSING THE PROBABILITY OF DEFAULT IN INDIAN TEXTILE FIRMS.
Hałaj, G. and Henry, J., 2017. Sketching a roadmap for Systemic Liquidity Stress Tests (SLST).
Suprihati, S., Romdhoni, A.H. and AM, G.W., 2018. INCREASING COMPANY
PERFORMANCE WITH LIQUIDITY, SOLVENCY IN CIGARETTE INDUSTRY
LISTED IN IDX. International Journal of Economics, Business and Accounting Research
(IJEBAR). 2(02).
Leśniak, A. and Juszczyk, M., 2018. Prediction of site overhead costs with the use of artificial
neural network based model. Archives of Civil and Mechanical Engineering. 18(3).
pp.973-982.
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