Giggling Brothers Financial Analysis

This assignment analyzes the financial performance of a toy company called Giggling Brothers. The analysis focuses on identifying the reasons behind negative cash flows despite past profitability, examining the company's late adoption of computerized systems compared to competitors, and suggesting ways for Giggling Brothers to learn from its competitors' experiences and improve its financial situation.

ACCOUNTING FOR MANAGERS

Answer 1.
Financial ratios are calculated to analyse the financial performance and financial position of
the company for a given period of time. There are basically four types of financial ratios-
liquidity ratios, profitability ratios, efficiency ratio and solvency ratios (Loughran, 2011).
The following calculation shows the financial performance and position for consecutive three
years:
1. Liquidity ratios
Current ratio
Particulars 2014 2015 2016
Current asset
69,00
0
77,00
0
87,00
0
Current liabilities
41,00
0
42,00
0
34,00
0
Current ratio
1.6
8
1.8
3
2.5
6
Current ratio is a kind of liquidity ratio to check whether the company has the ability to
pay its short term liabilities using its current assets (Harrison, Horngren & Thomas, n.d.).
It is always considered favourable when the current ratio is equal to one or greater to one.
A current ratio of 1 indicates that the current asset is equal to current liabilities whereas
the current ratio greater to one is an indication that the current asset of the company is
more than its current liabilities. The current ratio is increasing over the years and
therefore it is considered to be good. It was observed that the current ratio in 2014 was
1.68 whereas in the year 2016 it is 2.56 which shows a stronger financial position of the
company (Libby, Libby & Hodge, 2012).
Quick ratio
Particulars 2014 2015 2016
Current asset
69,00
0
77,00
0
87,00
0
Inventories
41,00
0
44,00
0
49,00
0
Current liabilities
41,00
0
42,00
0
34,00
0
Quick ratio
0.6
8
0.7
9
1.1
2
To know more about the liquidity position of the company, quick ratio is calculated. It is
considered more appropriate because inventories are excluded from current asset as it
cannot be converted into cash in a very short time. Quick ratio also follows the rule of

higher the better, it has also increased over the years. Overall we can comment that the
liquidity position of the company is quite good (Spiceland, Thomas & Herrmann, 2010).
2. Profitability ratio.
Operating profit margin
Particulars 2014 2015 2016
Operating profit
20,
000
11,
000
3,
500
Sales
2,00,0
00
1,80,0
00
1,65,
000
Operating profit margin
ratio 10% 6% 2%
The main motive of every company is to earn profits. If the company’s financial
performance is not good it is expected that it will not survive in the long run. Therefore,
in order to see the expected survival of the company operating margin ratio is calculated.
It has been seen that the operating profit margin is falling over the years which is adverse.
Therefore, we can conclude that there is a decline in the financial performance of the
company (Kimmel, Weygandt & Kieso, 2012).
3.Efficiency ratio.
The most important financial ratio that helps to analyse the financial position of the
company is called efficiency ratio. Efficiency is based on the assets and liabilities of the
company which reflects a true picture of financial position of the company. The data used in
the calculation of efficiency ratio is usually taken from the balance sheet of the company.
The few efficiency ratios that are calculated by me are inventory turnover ratio, total asset
turnover ratio, fixed asset turnover ratio, return on asset and return on equity ratio
(Weygandt, Kimmel & Kieso, n.d.).
Inventory turnover ratio
Particulars 2014 2015 2016
Sales
2,00,0
00
1,80,0
00
1,65,0
00
Inventories
41,0
00
44,0
00
49,0
00
Inventory turnover
ratio
4
.88
4
.09
3
.37
Total asset turnover ratio
Particulars 2014 2015 2016
Sales 2,00,0 1,80,0 1,65,0

00 00 00
Total asset
2,66,0
00
2,82,0
00
2,87,0
00
Total asset turnover
ratio
0
.75
0
.64
0
.57
Fixed asset turnover ratio
Particulars 2014 2015 2016
Sales
2,00,0
00
1,80,0
00
1,65,0
00
Fixed asset
1,97,0
00
2,05,0
00
2,00,0
00
Fixed asset turnover
ratio
1
.02
0
.88
0
.83
Return on asset
Particulars 2014 2015 2016
Net income 20,000 11,000
2,50
0
Total assets 2,66,000 2,82,000 2,87,000
Return on asset 8% 4% 1%
Return on equity
Particulars 2014 2015 2016
Net income
20,0
00
11,0
00
2,5
00
Total shareholders
equity
1,50,0
00
1,44,0
00
1,43,5
00
Return on equity 13% 8% 2%
4.Solvency ratio.
Debt ratio
Particulars 2014 2015 2016
Total liabilities 1,16,000 1,38,000 1,43,500
Total assets 2,66,000 2,82,000 2,87,000
Debt ratio 44% 49% 50%
The state of solvency of the company can be determined using the solvency ratio. Example of
the solvency ratio is debt ratio. The debt ratio is calculated by dividing total liabilities by total

asset. Lower the ratio better it is, it is seen that the debt ratio is increasing over the years
which is a negative aspect of the company (Ittelson, 2009).
(b) Financial ratios are used by a wide range of users to take certain economic decisions.
These financial ratios give the users the idea of the financial position and performance of the
company so the non financial aspect is ignored which may lead to wrong decisions.
There are also other limitations of these financial ratios (Harrison, Horngren & Thomas,
2015). They are-
 There are various types of financial ratios. Some may show that the company has a
good overall performance and is strong whereas some ratios may show a weak
position.
 The accounting is based on certain estimates, assumptions and different accounting
policies and therefore, the ratios may not be reliable enough to take important
decisions.
 The analysis may be distorted due to various seasonal factors, therefore it is
important to understand such factors as it will lead to reduction of chances of
misinterpretation.
 The financial statement may have been affected due to inflation or other market
conditions. Therefore, there always lies a confusion in the minds of the investors.
 Apart from earning profits, it is the duty of the company to satisfy the customers of
the company and fulfil the social obligations also. Therefore, the users should also
check whether the company is taking part in fulfilling its social responsibilities or
not.
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The financial ratios is just a tool that helps in the process of decision making but the in
the practical world it is important to collect the non financial information also along with
the financial ratios. It is also important to look at the capital structure of the company. If
there is a huge proportion of debt in the company then it is dangerous for the existence of
the company. There arises a doubt in the mind of the investors regarding the going
concern of the company. the users of the financial statements that include creditors,
lenders, investors and others must take decisions only after taking into consideration all
the various other factors. It has been observed that the retained earnings of the company
is also falling because of the falling profits.

Answer 2.
(a) Ethics are the moral values & principles that govern a person's behavior or an activity.
Working in ways that would go hand in hand with the societies & individuals thinking is
what considered to be good values. A business's key element to success is behaving ethically
that involves respect for the major key principles such as fairness, honesty, diversity, dignity,
equality and individual rights (Piper, 2015).
In the given case, Tom Lyons, the accountant of Allandale Ltd, has been in a big ethical
dilemma. The mortgage loan that the company took of $20 millions demanded two conditions
of maintaining current ratio of 2:1 & after tax return on assets as 10% minimum. However,
there is a boat valued at $500000 in the balance sheet that would have a net realizable value
as $350000. Also, a customer who was liable to pay $10 million could only pay half of the
amount due to severe financial troubles (Atrill & McLaney, 2009). Thus the provision
regarding the two amounting to $150000 and $200000 respectively meets all the three
conditions and are supposed to be recognized as provisions. However, this would lead to
falling of current ratio to 1.6:1 and the return on assets ratio to be 2% which was previously
stated at 2.1:1 and 11% respectively. Such making of provisions would fail to meet the
mortgage lender’s conditions and would lead to an immediate call of repayment of loan
amount. Thus, the dilemma arises here to recognize an expense which has in actuality not
occurred and by doing so, asking the situations itself to arise such issues that would take them
to bankruptcy as well as losing of their jobs.
(b) Tom should go for the following steps so as to deal with this ethical dilemma:
 The accounting standards states that a provision should be recognized only if three
conditions are met, that is, there must be a present obligation as an outcome of a past
event; the outflow of economic benefits to satisfy the obligation must be at least more
than 50% probable and the amount required for satisfaction of the obligation must be
estimated reliably. Thus, since all the three conditions are met, the provisions shall be
recognized.
 The presentation and preparation of financial statements are based on certain
assumptions one of which includes the concept of 'prudence'. This concept states that
such estimates and policies should be adopted that the incomes and assets are not
overstated as well as liabilities & expenses are not understated. It states that an asset
shouldn't be recognized at a value higher than what it is expected to be recovered in
the future and a liability shouldn't be recognized at a lesser value than what it is
expected to be paid in future. Thus, it is important for the company to go for this
recognition so as to behave ethically (Hart, Wilson & Fergus, 2012).
 The company, to avoid future bankruptcy, can write to the bank lender for some time
instead of immediate repayment so as to be able to cope up with the circumstances
and improve their present ratios.

Answer 3.
(a) Considering the management's difficulties and continuous negative cash flows, Giggling
Brothers should now replace their manual accounting system with computerized system and
should go for the adoption of Just-In-Time (JIT) system as their major problems revolves
around the mismanagement of inventory and therefore, excessive purchases are made at times
or lower sales are made sometimes. Just In Time inventory is a strategy to increase efficiency
as well as decrease waste as the goods are being brought into the production process only
when their requirement arises. Thus, reduces the inventory costs (Berry & Jarvis, 2007). This
is a strategy of having stock ready instantly to meet the demand of customers, but not to a
point when the company would again face the burden of heavy stock extra units.
The JIT strategy helps a company to trace its demand accurately and then accordingly go for
the purchase of materials required. In this manner, the purchase department of thr could make
an appropriate purchase of materials (Shim, Siegel & Shim, 2013). The computerized
software should be such adopted that when the credit balance of any customer goes below the
defined amount, it notifies the accounting department and further sales should be delay to that
particular customer until the previous debts are cleared.
(b) The adoption of JIT strategy along with the computerized system would serve a number
of advantages to the company as stated below (Lalli, 2012) :
 The company would be notified about the demand of their products and then, could
accordingly order input materials. In this way, it would be able to meet the customers
in a timely manner with high quality products at a possible low costs.
 JIT helps in reduction of overhead costs, material handling costs, storage costs, etc
and also, helps in early detection of defective goods so as to make an early correction
with at minimum costing (Loganathan, 1997).
 It frees up the funds as only required purchases would be made and such funds could
be used for some other purposes. Also, it will free up the warehousing space as
appropriate purchases wouldn't give rise to situations of storing excessive stock in the
warehouse.
 Such adoption demands the coordination between the departments as failure of one
department would lead to the failure of other department which is already happening
in thr company.Thus, with such adoption, the departments would work as a team
which would be indirectly good for the entire business (Izhar & Hontoir, 2001).
 The computerized system would lead to better maintenance of accounts and would
highlight the major weaknesses whether the company is making unnecessary
expenditures or whether the revenues are not being recognized but have been received
long before. Such problems occurring in the manual system would be eliminated.
 The computerized accounting system wouldn't be much time consuming in
comparison to previous system and therefore, the time saved could be used by the
accounting department in further tracing of better options and planning purposes for
the betterment of the company (Bhattacharyya, 2011).

(c) The cost of implementation of new computerized system would cost heavily to the
company. Thus, it is important for them to evaluate their other costs so against such
implementation of new system (Epstein & Lee, 2012). The company, as we know, is adopting
JIT strategy that would help them in reducing both inventory & overhead costs. Such funds
could be used elsewhere for further revenue or could be given as loan so as to earn an interest
income. In a similar way, the warehousing space that would be then free could be rented to
some other party so as to earn a rental income. The company can even go the replacement or
termination of employees as the computerized system wouldn't be requiring too much of
workers and a group of two or three members with expertise knowledge in that field would
work.
Thus, such steps would lead to a cost reduction in the company's expenses.
(d) While designing and developing the operating specifications of the new system of the
company, there are some more things that should be involved in that :
 The system should be representing the monthly cash flows as the company has been
facing severe negative cash flows in every 6 months so as to take immediate steps if
even after new adoptions, the same thing continues.
 The system should be presenting a quarterly report regarding every case be it
purchases made, sales made or accounts receivables account so as to avoid
mismanagement or loss of unnecessary cash.
 The accounting department should keep an eye on the unusual sales made if
exceeding certain limit and make an enquiry about that as maximum fraud occurs if
the company has poor management of accounting records. Thus, to avoid the
advantages that can be taken, the accounting department should be either trained or
replaced with experts of the field.
 An accounting of funds should be made separately so as to actually analyze all those
activities where the funds are being used and whether it was worth enough or not and
the benefits reached or the costs incurred if in case.
(e) Giggling Brothers has been trading profitability in the past years but is suffering from
negative cash flows currently. In the generation of computerized system, where the company
is already late in adopting it, the competitors of it would have adopted it long before and is
now with different targets. Thus, there is a difference of level, that is, the company under
question is at that level where its competitors have already been long before. The competitors
might have faced the difficulties too initially and might have then adopted such strategies so
as to enjoy benefits. The competitors must have made a number of approaches for having the
best and to arrive at the most profitable level. Thus, Giggling Brothers should make use of
such information to avoid these difficulties in advance. It is rightly said that we learn from
mistakes and experience. Thus, evaluating the approcahes adopted and the experience of the
competitors would work in the betterment of the company under question. Thus, such an
examination would be definitely serving benefits to Giggling Brothers.

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