Investment Advisor Report: A2 Milk Company Financial Analysis

This report provides a comprehensive financial analysis of A2 Milk Company, focusing on its accounting system and financial processes. The report begins by examining the bad debt method used by the company, which is identified as the aging method, and specifies the bad debt expense for 2016. It then contrasts this method with the percentage of sales method, highlighting their differences in estimation and application. The analysis proceeds to evaluate the company's financial position using key ratios, including the current ratio, net profit ratio, and debt ratio, with supporting charts to illustrate trends. The report assesses the company's sustainability based on the financial data, concluding that A2 Milk is in a stable position. Finally, the report offers an investment recommendation based on the financial analysis, advising whether an investment in the company is advisable.

Accounting System and Process

ACCOUNTING SYSTEM 1
EXECUTIVE SUMMARY
The main aim of this report is to understand the financial information by evaluating the
liabilities. In this report, the evaluation has been done on A2 Milk Company to analyse the
financial position. The analysis states that the company used the aging method to determine
the debt. After that, the ratios are also determined to analyse the sustainability of the
company. Net profit, current ratio, and debt ratio has been evaluated to determine the
financial position of the company. In the end, it is founded that the company is in the stable
position.

ACCOUNTING SYSTEM 2
Contents
Introduction...........................................................................................................................................3
Method of Bad Debts used by the company..........................................................................................3
Methods of Bad Debts and Differences.................................................................................................4
Ratios....................................................................................................................................................5
Sustainability.........................................................................................................................................7
Conclusion.............................................................................................................................................7
References.............................................................................................................................................8

ACCOUNTING SYSTEM 3
Introduction
Accounting is the systematically, recording, measuring and communication information
about financial transaction. The main aim of this report is to understand the financial position
of the company in terms of finance. In this report, the methods of bad debts will be discussed
and later on the discussion is made on their differences. After that, the ratio of the company
will also be evaluated to analyse the stability of the company. A2 Milk Company has been
taken into consideration to evaluate the sustainability of the company.
Method of Bad Debts used by the company
It has been seen that the company uses the aging method to estimate the bad debts. As per the
method, the company estimate the bad debts on the basis of days. The company also uses the
Allowance for doubtful debts method to write off the bad debts as per the estimation of days.
As per the financial report of the company, it has been seen that the $69000 was spend by the
company as Bad and Doubtful Debts.
(Source: A2 Milk Company, 2016)

ACCOUNTING SYSTEM 4
Methods of Bad Debts and Differences
There are two methods of estimation of bad debts in the accounting terms and policies and
these are aging method and percentage of sale method.
Aging method is a technique which is used by the company to determine the credit balance
needed for the allowance of doubtful accounts. In this method, the bad debts are estimated on
the basis of days (A2 Milk Company, 2016). This method is usually take place by sorting the
company accounts receivable according to the dates of these unpaid invoices. The company
estimated the good and bad debts in terms of days such as below the 30 days it comes under
the good days. The amount above the 60 days comes under the bad debts and so on. The main
objective of this method is to maintain the accurate balance sheet report which contains the
true amounts of receivable (Weygandt, Kimmel, and Kieso, 2015).
Percentage of sales method helps to estimate the credit amount on the basis of past years. In
this method, bad debts are calculated in the terms of percentage. The company evaluate the
percentage of bad debts with the total net sales or credit sale of the past years (Financial
Accounting, 2018).
Difference between the aging method and percentage of sale method
Aging method is estimated on the basis of days but percentage of sale method is estimated on
the basis of total net sales and bad debts in the past years.
The value is estimated in terms of digits of rupees in the aging method but in percentage
method, the value of bad debts is estimated in the terms of percentage.

ACCOUNTING SYSTEM 5
In the aging method, the debtors are classified in the groups as per their amount credits in the
days. In the percentage method, the debtors are not classified in the groups.
In the aging method, the value of bad debts is estimated on the current year values but in the
percentage method, the bad debts is estimated on the basis of past year sales (Accounting
tools, 2017a).
S. No. Ratio’s Formula’s 2016
1) Current ratio
Current assets
Current liabilities
$ 1,82,423.00
$ 76,808.00 2.38
2) Net profit Ratio
Net Profit
Net Sales
$ 30,436.00
$ 3,52,502.00 8.63%
3) Debt ratio
Total Debt
Total assets
$ 77,074.00
$ 2,10,152.00 0.37
Financial Analysis of A2 Milk Company
Ratio’s Chart
Net profit Ratio
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
Net Profit Ratio of A2 Milk
2015
2016

ACCOUNTING SYSTEM 6
Current ratio
1.90
1.95
2.00
2.05
2.10
2.15
2.20
2.25
2.30
2.35
2.40
Current Ratio of A2 Milk
2015
2016
There are three major ratios which help to estimate financial position of the company and
these are current ratio, net profit ratio and debt ratio. The current ratio is related with the
current assets of the company which helps to analyse the current asset of the company.
(Accounting tools, 2017b) Net Profit Ratio is related with the net profit of the company
which is necessary to analyse the financial position. Debt ratio helps to estimate the solvency
position in order to achieve the success in the future.
Sustainability
From the above analysis, it has been seen that company earns the more revenue as compare to
the last year. In 2015, the company faced the loss which is reflected by the net profit ratio.
The current ratio of the company is also increasing which reflects that the company is in the
appropriate position where the current asset is increases. In 2015, the debt ratio is 0.34 which
is increases in 2016 by 0.37 which is not beneficial for the company but there is no high ratio
(A2 Milk Company, 2016). The debt ratio of the company states that the company in the

ACCOUNTING SYSTEM 7
stable position. The evaluation of analysis states that the company is in the position of
sustainability (Accounting tools, 2017c).
Conclusion
From the above analysis, it has been concluded that the financial position of the company is
improved which is reflected by net profit ratio. The company uses the aging method in order
to evaluate the bad debts. There are three major ratio which helps to evaluate financial
position such as current ratio, net profit ratio and debt ratio. These three ratios are contributed
in the success of the organisation by analysing the position in the terms of revenue to survive
in the market. The evaluation shows that the company is in the sustainability position to
survive in the market and capable to invest in the further projects.

ACCOUNTING SYSTEM 8
References
A2 Milk Company. (2016). Annual Report 2015–2016. Retrieved from:
https://thea2milkcompany.com/wp-content/uploads/A2ML0029-a2-2016-
AR_Spreads.pdf
Accounting tools. (2017a). Bad debt expense. Retrieved from:
https://www.accountingtools.com/articles/2017/5/11/bad-debt-expense
Accounting tools. (2017b). Current ratio. Retrieved from:
https://www.accountingtools.com/articles/2017/5/16/current-ratio
Accounting tools. (2017c). Net profit margin. Retrieved from:
https://www.accountingtools.com/articles/what-is-net-profit-margin.html
Financial Accounting. (2018). 8A – Estimating Bad Debts. Retrieved from:
https://courses.lumenlearning.com/sanjacinto-finaccounting/chapter/estimating-bad-
debts/
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E. (2015). Financial & managerial accounting.
UK: John Wiley & Sons.