Financial Statement Analysis, Cost-Volume-Profit, Budgeting - ACCTG 101

This assignment covers Financial Statement Analysis, Cost-Volume-Profit, and Budgeting for ACCTG 101 course at The University of Auckland. It counts for 10% of the final grade. The Financial Statement Analysis section covers Ratio analysis, Net Profit Margin, Debt to Equity Ratio, Interest Coverage Ratio, and their trends. The Cost-Volume-Profit section covers break-even analysis, margin of safety, and promotion proposal. The Budgeting section covers cash budget for the 3 months ended 31 December 2018 and a memorandum discussing the quarterly analysis of cash flow.

ASSIGNMENT 02 ANSWER BOOKLET ACCTG 101
THE UNIVERSITY OF AUCKLAND
SECOND SEMESTER, 2018
Campus: City
ACCOUNTING
ACCTG 101 – Accounting Information
Due date: 4 pm Thursday 4 October 2018
LAST NAME STUDENT AUID
FIRST NAMES
QUESTION TOPIC MARKS
1 Financial Statement Analysis 20
2 Cost-Volume-Profit 15
3 Budgeting 15
50
NOTE
1. This assignment counts for 10% of the final grade. There is no Plussage.
2. Attempt ALL questions.
3. Fill out your personal details on Page 1.
4. Answers should be provided in a clear and concise manner demonstrating a high
standard of communication skills. Type answers into the corresponding boxes.
5. Type your answers using Verdana 10 Font. No hand written answers will be
accepted.
6. Present numerical work clearly and concisely. Show your workings, as they will be
graded. Full marks will be given only where a solution is supported by clearly labelled
workings.
7. See details on submission of this booklet on the first page of the assignment
question.
YOU MUST SUBMIT THIS BOOKLET ELECTRONICALLY.
CONTINUED

ASSIGNMENT 02 ANSWER BOOKLET ACCTG 101
1. Financial Statement Analysis: 20 marks
(a) Ratio
2017 2016
Return on Assets ( 105
7673 )∗100=0.20 % ( 473
7267 )∗100=6.51 %
Trend: ROA has decreased in 2017 and hence, decline in the profitability has been
reported in 2017.
Debt to Equity Ratio ( 1903
3580 )=0.53 ( 1339
3713 ) =0.36
Trend: Long term debt has increased in 2017 coupled with decrease in equity and hence,
the balance sheet would be considered as more leveraged in 2017 as compared with 2016.
Interest Coverage Ratio ( 273
111 )=2.46׿ ( 719
115 )=6.25׿
Trend: Significant decrease has been observed in 2017 and hence, This is indicative of
higher solvency risks because of the fall in the profit margins.
(b)
Components 2017 2016
Net Profit Margin ( 105
9399 )∗100=1.12 % ( 473
9004 )∗100=5.25 %
Asset Turnover ( 9399
7673 )=1.22 ( 9004
7267 )=1.24
Discussion:
There is a significant drop witnessed in ROA in the year 2017 which has resulted primarily
due to drop in the net profit margin. The value of net profit margin was 5.25% in 2016 but
the value has plummeted to 1.12% in 2017. The difference is more than 500 basis points
which is caused due to reduction in the gross margin. Moreover, the asset turnover has
also reduced in 2017 but the fall is marginal only when compared to corresponding number
for 2016. Hence, the main reason behind this drop in ROA is the decline in the profitability
in 2017 as compared with 2016 (Arnold, 2015).
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ASSIGNMENT 02 ANSWER BOOKLET ACCTG 101
(c) In 2017, the key significant items may be attributed to expenditure in relation to costs
related to site closure coupled with impairment costs that have been incurred in relation to
both distribution and building product segment. There is a crucial impact of this item on the
company’s profitability in 2017. One of the key differences in the income statement of 2017
when compared to 2016 is the rising expenditure related to significant items. In the
absence of these, the reported profit could potentially have been twice of the reported
value. Despite the importance of significant item, it would be incorrect to conclude that it is
solely responsible for the dwindling profits in 2017 since a major role is also played by the
shrinking gross profit margins (Damodaran, 2015).
(d) A key strength related to ratio analysis usage is that it allows the comparison of the
financial performance of the given firm across time periods and also in regards to the
industry performance. One potential shortcoming or weakness of using ratio analysis is that
it basis itself on the historical performance which may not provide accurate indication of
future performance of firm especially if the business environment is changing (Brealey,
Myers & Allen, 2014).
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ASSIGNMENT 02 ANSWER BOOKLET ACCTG 101
2. Cost-Volume-Profit: 15 marks
(a) Revenue per unit ¿ 480000
6000 =$ 80
Variable cost per unit ¿ 336000
6000 =$ 56
Unit contribution margin = $80-$56 = $24
Number of units at break-even = ( 105000
24 )=4375 units
Total sales at break-even point ¿ 4375∗80=$ 350,000
Planned sale units = 6000 units
Margin of safety ¿ [ 6000−4375
6000 ]∗100=27.08 %
(b) The utility of the breakeven analysis can be understood from the fact that it allows the
company to understand the minimum units and sales it needs to generate in order to
break even. Also, using the margin of safety, it can be estimated how much adverse
deviation from estimates can the business sustain without making losses (Damodaran,
2015).
(c)(i)
Revenue per unit ¿ 480000
6000 =$ 80
Variable cost per unit ¿ $ 56+$ 9=$ 65
Unit contribution margin = $80-$65 = $15
Number of units at break-even = ( 105000+2800
15 )=7187units
Contribution margin ¿ 15 ( 6000+4000 )=$ 150,000 (estimated)
Fixed cost ¿ 2800+105000=$ 107,800(estimated)
Let, the promotion proposal ge agreed and the revised profit would be computed as show
below.
Profit (Estimated) =150000-107800=$42,200
(c)(ii)
Requisite profit that needs to be derived = $39,000
Fixed cost = 2800 +105000 = $107,800 (estimated)
Unit contribution margin = $80-$65 - $15 (estimated)
Number of sale units needed to derive the requisite profit ¿ 107800+39000
15 =9787 units
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ASSIGNMENT 02 ANSWER BOOKLET ACCTG 101
(c)(iii)If the offer advocated by marketing manager would increase, the profit amount
would be expected to increase as indicated from the computations above. However, since
a free ticket would be given without increasing the price, hence there has been decline in
the unit contribution margin. Also, the fixed costs have increased leading to an increase in
breakeven sales level. The key assumption is that the company has a spare capacity to
supply additional 4000 units. Also, no fixed costs would be required for this increase in
production. Further, it has been assumed that the cost structure of the existing units would
not alter with higher production levels (Arnold, 2015).
(d) The fact that the revenues are same would not to the conclusion of operating margins
being same. This is because the operating margin would be dependent on the underlying
expenses that the business incurs that would be further dependent on type of business.
Also, in relation to determination of safety margins, the underlying fixed costs also would
be considered which across firms would be quite difference. For a firm having higher
operating margins and limited fixed costs, a higher safety of margin can be derived
(Brealey, Myers & Allen, 2014).
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ASSIGNMENT 02 ANSWER BOOKLET ACCTG 101
3. Budgeting: 15 marks
(a) Cash budget for the 3 months ended 31 December 2018.
Spatial Prints
Cash Budget for the 3 months ended 31 December 2018
October November December
Receipts
Cash collection from last
month 60000
50400 64800
Cash collection from 2
months ago 24000 33600
Total Inflows 60000 74400 98400
Payments
Purchase:
In the current month 60480 70400 78240
From last month 12000 15120 17600
Operating expense 16000 18400 21200
Shop fittings 20000
Total Outflows 108480 103920 117040
Net cash flow −48480 −29520 −18640
Opening cash balance 72000 23520 −6000
Closing cash balance 23520 −6000 −24640
Workings:
1. $5000 would be subtracted each month because operating expenses comprises
$5000 as depreciation amount which is in non-cash form.
2. Sum of net cash flow and opening cash balance would equal to the closing cash
balance.
3. The difference between the total cash inflows and total cash outflows would be the
net cash flow.
4. Cash collection in case of October
( 60 % ∈Nov . ) =( 60
100 )∗84000=$ 50,400
( 40 %∈Dec . )= ( 40
100 )∗84000=$ 33,600
5. No cash inflows derived from the sales in December month as the same would be
derived in January and February.
6. Purchase payments for October
( 80 % ∈Oct . ) =( 80
100 )∗75600=$ 60,480
( 20 % ∈Nov . )=( 20
100 )∗75600=$ 15,120
Page 6 of 8

ASSIGNMENT 02 ANSWER BOOKLET ACCTG 101
Memorandum.
Addressed to: Management, Spatial Prints
From: Accountant, Spatial Prints
Date: 4th October, 2018
Subject: Quarterly Analysis of Cash Flow
Dear Sir/Madam
The sales growth rate witnessed by the company during the quarter has been in the
vicinity of 20% per month. Aided by this top-line growth, the profits of the company
has tripled in the month of December when compared to corresponding October
figures. The continuation of the company in this manner would imply that the company
has a bright future ahead (Damodaran, 2015).
In the October to December peak season, the purchases made have been higher in
order to satiate the higher consumer demand. For the company, the average collection
period from debtors is higher than the payable period. This brings into picture a
temporary crunch of liquidity for the company operations which can be resolved
through the use of a seasonal loan. This would ensure unfettered raw material supply
from suppliers and continuous growth in business going forward (Arnold, 2015).
The October starting cash balance was $ 72,000 which has proved to be grossly
insufficient to meet the expected outflows during the quarter. Going forward in order to
ensure that customer demand is fulfilled in a timely manner, the company would need
to have higher cash in hand so as to pay the suppliers on time. Further, in the medium
term, the company ought to take measures to lower the cash cycle by lowering the
receivable collection days or elongate the payable days without adversely impacting
the operations of the company (Brealey, Myers & Allen, 2014).
Yours truly
ACCOUNTANT
Page 7 of 8

ASSIGNMENT 02 ANSWER BOOKLET ACCTG 101
Reference list:
Place references for all questions in this box:
Arnold, G. (2015) Corporate Financial Management. 3rd ed. Sydney: Financial Times
Management.
Brealey, R. A., Myers, S. C., & Allen, F. (2014) Principles of corporate finance, 2nd ed. New
York: McGraw-Hill Inc.
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
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