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Auditing and Assurance Assignment

   

Added on  2019-11-19

5 Pages1565 Words184 Views
AUDITING AND ASSURANCEQuestion 3The objective is to compute the various given ratios and to comment on the same based on the industry averages.Current RatioCurrent Ratio = Current Assets/Current LiabilitiesCurrent Ratio (For Billabong FY2015) = (523753000/236768000) = 2.21Current Ratio (For Billabong FY2016) = (464454000/197932000) = 2.35From the above computations, it is apparent that the current ratio of the company for both theyears is superior in comparison to the industry average of 2 which augers well for the shortterm liquidity of the company (Billabong, 2016). Further, a positive aspect for the company isthe improvement in the current ratio from 2015 to 2016 on account of decreasing currentliabilities whose % decrease exceeded that witnessed for current assets (Arens et. al.,2013).Debt to Equity RatioDebt to equity ratio = Liabilities/ EquityDebt to equity ratio (For Billabong FY2015) = (522396000/281584000) = 1.86Debt to equity ratio (For Billabong FY2016) = (484959000/259289000) = 1.87From the above computations, it is apparent that the debt to equity ratio for the company forboth years is significantly inferior in comparison to the industry average of 1. This isindicative of the balance sheet being over leveraged especially considering that the businessis still making losses and thereby swelling the already existing retained losses from previousyears. As a result, the total shareholders’ equity also has declined in FY2016 (Billabong,2016). Going forward, it is essential for the company to generate profits like it did in FY2015or else it would be difficult to bring down the debt equity ratio. The current value clearlyposes significant solvency risk going ahead (Caanz 2016).Gross Profit MarginGross profit margin = Gross profit/Net Sales

AUDITING AND ASSURANCEGross profit margin (For Billabong FY2015) = (1051818000-495308000)/1051818000=52.9%Gross profit margin (For Billabong FY2016) = (1100429000-542373000)/1100429000=50.71%From the above computations, it is apparent that the gross profit margin for the company isinferior in comparison to the industry average of 60%. Clearly, there seems to be hugedifference which clearly is a worrisome sign for the company considering the ongoing lossesthat it is making. Further, even more cause of concern is that on y-o-y basis, there is asignificant dip in the margins by 225 basis points especially when the margins are alreadylower than the industry. This seems to be one of the major contributory reasons for the lowprofits after tax and occasional losses like in FY2016 (Billabong, 2016).Inventory Turnover Inventory Turnover = Cost of Sales/Average InventoryInventory Turnover (For Billabong FY2015) = 495308000/(187125000+180222000)/2 = 2.70timesInventory Turnover (For Billabong FY2016) =542373000/(185556000+187125000)/2 = 2.91timesFrom the above computation, it is apparent that even though the company has improved theinventory turnover from FY2015 to FY2016 but still it remains significantly inferior to theindustry average of 4 (Billabong, 2016). This presents a significant business risk for thecompany since owing to low inventory turnover the top line growth would be muted.Coupled with lower profit margins than industry average, this has significant implications forthe business going ahead. It is apparent that the company needs to take drastic measures inorder to enhance sales and prudently manage inventory so as to reduce the associated costsand also ensure that revenue growth is improved on account of faster turnaround of inventory(Gay and Simnett, 2012).Trade Receivables TurnoverTrade Receivables Turnover = Net credit sales/Average net receivables

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