Business Evaluation Report for 115.112 Accounting, Semester 1, 2019

This report provides an evaluation of Twanji Variety Stores' business performance, focusing on the years 2017 and 2018. It begins with an introduction outlining the report's purpose: to provide feedback and recommendations to Ms. Chusan regarding her business's management. The analysis is divided into two main parts. The first part examines the profitability of the business, discussing factors affecting profit decline despite increased sales. It analyzes the gross profit margin, cost of goods sold, advertising expenses, and critical expenses like wages and interest. It also compares the company's performance with industry averages. The second part assesses management efficiency, using ratios such as inventory turnover, number of days in selling period, accounts receivable turnover, and number of days in the collection period. The report concludes with recommendations for improvement, including cost control measures, reduction in advertising expenditure, and strategies to enhance financial performance. The report utilizes financial ratios and industry benchmarks to provide a comprehensive analysis, supported by references to relevant financial and accounting literature.

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115.112 Accounting
Assignment 2
Business Evaluation Report
Semester 1, 2019

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Contents
Introduction......................................................................................................................................3
Discussion and Analysis..................................................................................................................3
Part 1: Discussion on profitability performance of Twanji Variety Stores..................................3
Part 2: Efficiency of management at Twanji Variety Stores.......................................................3
Conclusion and Recommendations..................................................................................................4
References........................................................................................................................................5

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Introduction
The purpose of this report is to provide the feedback to Ms Chusan on her management of
her business and possible recommendations for improvement. Ms Chusan operates the variety
shop (Called as Twanji Variety Stores) and she has found that in year 2018, business reflects
increase in sales but profit has been decreased as compared to previous year 2017.
Discussion and Analysis
Part 1: Discussion on profitability performance of Twanji Variety Stores
There are number of factors that cause profit to decline irrespective to increase in sales.
For this purpose it is important to check each line item of profit and loss statement before driving
to any conclusion. Sales in year 2018 has increased by 14.84 % but same has been reflects in
gross profit margin ratio. Firstly it is important to look for gross profit margin in year and
compare the same with previous year in order to find out proportionate change in cost of goods
sold. Gross profit margin ratio was 26.37% in year 2017 and decreased to 23.81% in year 2018
and it is all because of increase of cost of goods sold by 18.83% in year 2018 as compared to
year 2017. It has been found that Ms Chusan has invested almost double the amount in
advertising of the product in year 2018 as compared with year 2017 but the resultant increase in
sales is very less. The increase in general expenses seems not satisfy the increase in sales and
they are paid irrespective to incoming sales. Most critical factors are wages and interest expenses
as they have increased almost by 40% but had not contributed to the sales value in required
value. Profitability of Twanji Variety Stores is when compared with the industry average it can
be said that performance was under average. Although in year 2017, performance of company
was above average in all respect such as profit margin, gross profit margin, return on assets and
return on equity. Net profit ratio had declined to 3.15% but the industry average was 7% which is
far better. Looking at the return on assets it is crucial to say that management has failed to make
use of assets as it was expected. Similarly rise in equity capital was nit supported by the rise in
return on equity but it had decreased to 11.21% as compared to 23.20% in year 2017
(Damodaran, 2011).
Part 2: Efficiency of management at Twanji Variety Stores
 Inventory turnover ratio: This ratio provides how many times the inventory has been
sold or used in the particular period. Inventory turnover ratio of company has been
increased to 8.29 times in year 2018 as compared to 6.44 times in year 2017 and it is also
greater than industry average. Increase in inventory turnover reflects that management
had been successful in turning the inventory but fails to obtain the required results.
 Number of Days in Selling Period: This ratio is similar to inventory turnover but it
shows number of days used to convert average inventory. It has been found that
management takes less number of days in year 2018 to convert inventory into cost of

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goods sold and it is also very less as compared to industry average (Davies and Crawford,
2011.
 Account Receivable turnover ratio: This ratio provides number of times the receivables
has been collected from customer during the year. Management performance was not as
per required expectation as they have collected receivables in low proportion which is
even lessor than the previous year.
 Number of Days in Collection Period: It has been found management has failed to
collect receivables on time and it has increased the collection period to 57 days as
compared to 42 days in year 2017 (Moles and Kidwekk, 2011).
Conclusion and Recommendations
On the basis of overall analysis of profitability and management efficiency there can be
many recommendations that can improve the performance. Firstly, management has to take
measures to control to cut the cost put in to cost of goods sold and it can be done through seeking
help from the cost and control department. Material and labour cost are variable in nature and
they can be easily reduced through purchasing the material in bulk quantity and also introducing
labour incentive scheme on the basis of their performance. It will help to increase the sales and
control the cost. It is highly recommended to reduce the expenditure on advertising as it is not
successful in increasing the sales as expected (Krantz, 2016).

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References
Damodaran, A, 2011. Applied corporate finance. USA: John Wiley & sons.
Davies, T. and Crawford, I., 2011. Business accounting and finance. USA: Pearson.
Krantz, M. 2016. Fundamental Analysis for Dummies. USA: John Wiley & Sons.
Moles, P. and Kidwekk, D. 2011. Corporate finance. USA: John Wiley &sons.

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Appendix
2018 2017 Industry Marks
1 Profit
Margin (37100 *100)/1176000 =
3.15%
6.89% 7% 2
2
Gross
Profit
Percentage
(280000*100)/1176000= 23.81% 26.37% 25% 2
3
Return on
Total
Assets
((37100+4100)*100)/((479400+460000)/2)
= 8.77%
(Total Assets = Non Current assets
+Current Assets)
17% 12% 4
4
Return on
Owner’s
Equity
(37100*100)/((335200+326800)/2)=
11.21%
23.2% 20% 2
5 Inventory
Turnover
896000/((96000+120000)/2)=
8.29X 6.44X 7 X 2
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Number of
Days in
Selling
Period
365/8.29 = 44 days 57 days 52 days 2
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Accounts
Receivable
Turnover
1176000/((225600+138400)/2)=
6.46X
8.68 X 9.125 2
8 Number of
Days in 365/6.46= 42 40 2

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Collection
Period
57 days
9
Sales
Percentage
Increase
((1176000-1024000)*100)/1024000=
14.84%
3% 5% 2