Comprehensive Financial Analysis Report: Effective Distributors Ltd

This accounting report presents a comprehensive financial analysis of Effective Distributors Ltd. It begins with an executive summary highlighting key issues and then delves into a detailed examination of profitability ratios (ROE, ROA, net profit margin), inventory management, and other relevant financial ratios. The analysis covers the years 2015 and 2016, offering insights into the company's performance and identifying areas for improvement. The report also addresses ethical issues, specifically financial statement misrepresentation and accounting fraud, discussing the responsibilities of accountants and the potential consequences of unethical practices. The report further explores the role of computerized accounting systems, emphasizing their importance in managerial decision-making and overall business operations. Recommendations for cost reduction, customer acquisition, and inventory management are provided, offering practical strategies for enhancing the company's financial health and operational efficiency.

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Accounting
Name:
Course
Professor’s name
University name
City, State
Date of submission

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Question 1
Executive summary
This is a report shall be highlighting the major problems that Effective Distributors ltd is
encountering. A comprehensive financial analysis will be carried out , starting from the
profitability ratios( i.e return on equity and return on assets) the gross profit margin for the
company and the net profit margin that will show how the company’s profit varies and how the
profits may be improved. The report will also cover how effective the company maintains its
inventory through the calculation of inventory ratios. Other ratios that the reports analyses are
the selling ratio, finance ratio, accounts receivable, current account, acid test ratio among others.
Recommendations on the ratio analysis will be provided.
Introduction
This is a comprehensive survey of the trading activities conducted by effective distributors
limited whose directors are concerned with the company’s operations and hence have asked for a
comprehensive report for the company. From the income statement for the year 2016 we shall
analyze all the important ratios for the company to evaluate and comment on which aspect of the
company it needs to improve on(Hodge, 2008).
Ratio analysis
Profitabilirty ratios

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These are ratios that assesses the ability of the company to generate earnings compared to the
relevant costs and expenses that it incurred during a specific period. Having a higher ratio
relative to the same ratio from the past period indicates that the company is doing well.
Return on Equity(ROE)
This is the amount of net income returned as a percentage of shareholders equity. It measures
company’s profit generated from the shareholders equity. Return on equity is calculated as
follow:
Return on Equity=Net income/ shareholders equity
Ratio Formulae 2015 2016
Return on
Equity(ROE
)
Return on
Equity=Net
income/
shareholder
s equity
11000/144000*100%=0.076=7.6
%
3500/143500*100%=0.02
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=2.4%
Return on Assets(ROA)

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This ratio measures the efficiency of the company’s assets to produce profits. Therefore, if the
company is managing its assets effectively to produce profits during the period(Horngren, 2014).
The ratio is calculated as follows.
R.O.A=Net income/ Average total Assets
Ratio Formulae 2015 2016
Return on
Assets
R.O.A=Net
income/ Average
total Assets
11000/282000*100%=3.9% 3500/287000*100%=1.2%

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The two ratios return on Equity and Return on Assets have decreased from 2015 to 2016 as
follows For R.OE 7.6%.in 2015 to 2.4% in 2016. For the return on Asset ratio, there is also a
decreased from 3.9% to 1.2%.
Net Margin Ratio
This ratio measures the percentage of net income of an entity to its sales. The formula for this is
net income/ net sales(Montana and Charnov, 2000).
Ratio Formulae 2015 2016
Net Margin net income/ net
sales
11000/180000*100%=6.1% 3500/165000*100%=2.1%
The sales of the company have decreased from 180000 to 165000 as the nerd income also
decreases in the two years.
Selling ratio
This is calculated by subtracting expenses from revenue to get profit which is then divided by the
sales.
.

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Ratio Formulae 2015 2016
Selling Ratio profit/ net sales 20000/180000*100%=11% 6000/165000*100%=3.6%
the selling ratio has decreased from 2015 to 2016. From the analysis of these ratios the company
is on downward trend as the sales have decreased by 15,000. Also, the gross profit decreased
from 2015 to 2016.
Current Ratio
ratio Formulae 2015 2016
Current ratio Current assets/
Current Liabilities
77000/42000=1.8:1 87000/34000=2.4:1
The current ratio of the company is healthy, this means that it can meet its current obligations
without any problem. Actually, the ratio for the yaer 2016 has surpassed the ideal current ratio
that is set by accounting standards which is 2:1. But, this also shows that the company is
keeping too much of its assets in form of short term assets instead of investing in the company.
Quick Ratio
ratio Formulae 2015 2016

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Current ratio Current assets-
inventory/ Current
Liabilities
77000-
44000/42000=0.78:1
87000-
49000/34000=1.1:1
The company quick ratio is showing that the company has been managed well, this ratio is
usually set at 1:1 which is ideal for any company as set by the international accounting bodies.
Accounts receivable
Inventory turnover ratio shows how the company manages its inventory. It measures how many
times an inventory has been turned.
ratio Formulae 2015 2016
Inventory turnover
ratio
Cost of goods
sold/average
inventory
84000/44000=1.9 75000/49000=1.5

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Recommendations
. Reduce costs. The management should look into the company’s spending to see which ones
they can cut. For example, if the rent is very expensive,they can try to negotiate staggered
payments with the landlord, or a discount this year in exchange for paying a little more per
square meter in subsequent years. If the shipments are too expensive, they should call other
suppliers to see who offers the most competitive cost plan(Scarborough, 2014).
Find new customers. This does not have to be expensive. Currently, everyone resorts to Google
to find the services they need. We can hire a pay-per-click advertising program. Manage the
inventory in a more effective manner by buying the raw materials that will be used. The
company’s bottom-line has reduced drastically in the last three years which means that the
expenses will have to be reduced. It should also carry out an aggressive marketing campaign to
aid in improving the company’s sales(Williams, n.d.).
Question 2
The ethical issue in this case is financial statement misrepresentation to paint Allandale Ltd in
good light. The problem is that if Tom Lyons the accountant correctly posts the figures of the
unsold boat and increases the provision for doubtful debt, then the company’s current ratio

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would fall to 1.6:1 and the return on assets would fall to 2%. This would force the company to
pay a $20million mortgage loan which would render it bankrupt. Thus, the problem in this case
is misrepresentation to avoid paying of the loan. Fraud is another ethical issue , which is a
deliberate act that can result to financial harm. Fraud is a criminal act and when there is proof
that one of the parties suffered financially.
The stakeholders are the employees of Allendale ltd because they will lose their jobs if the
company goes ahead to repay the loans. The other stakeholder is the bank that extended a $20
million loan to Allendale Ltd. This company will be directly affected by inability of Allendale ltd
to pay up the loan.
Principles and values
The following are the principles and values that should guide an accountant in his/ her
profession. An accountant like Tom Lyons should perform his duties guided by the highest sense
of integrity. Accountants should not misrepresent the company by sticking phony numbers in
the balance sheet. Any form of Misstatements by omission or ignoring obtainable information
while carrying out their duties is wrong in this profession(McGee and Preobraženskaâ, 2005) .
Thus, Tom Lyon is expected to prepare the company’s financial statements using the correct
figures and without leaving out any information that would mislead the stakeholders of the
company. The other guiding principle that should be used by the accountant is the objectivity

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principle. The objectivity principle states that all measures and figures used in accounting
should be verifiable, objective and true.
Approach to accounting fraud and its main effects
The effects on the financial statements arising from the existence of accounting fraud, they do
not reflect the economic reality of the company, thus violating the basic accounting principles
governing
both the conduct of the accountant, and his work and product. Different users of accounting
information are affected directly with fraudulent financial statements, since the decisions that
they take tend to be wrong since the base information is not real and therefore they can suffer
effects in the decisions of investment, financing and others(Stice, Stice and Diamond, 2006).
Frauds that directly affect the financial statements are focused on in the overvaluation and
undervaluation of revenues, costs and expenses, inadequate increases or decreases in balance
sheet accounts, incorrect disclosure and inadequate application of the principles of accounting.
Causes of action
If the accountant goes ahead and manipulates the financial statement then one of the stakeholders
suffers due to the manipulation, then it is only right to bring action against those responsible in
this case , Tom Lyon the accountant is the one who should be sued. It is important to collect
enough evidence to show that the manipulation of the financial statements happened. Tom
should accurately represent the company by disclosing the true and fair value of an assets that
includes the boat and also disclose the true figure of the doubtful debt. Then proceed to talk to

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the bank to see if they can be allowed some more time to repay the loan(Schaltegger, Bennett
and Burritt, 2006).
Question 3
Question 3
Accounting is the basis on which managerial decisions and therefore financial decisions are
based.
There is no economic activity outside the registry and involvement of the techniques of
accounting science. From the smallest economic activity to the economic transactions of large
corporations, accounting science contributes to a great deal of knowledge, which requires them
to be applied by highly trained public accounting professionals. Giggling brothers is no
exception(Peltonen, n.d.)..
Computerized Accounting system is a system adapted to classify the economic facts that occur
in a business. In such a way, it becomes the central axis to carry out various procedures that will
lead to the obtaining of the maximum economic return that implies to constitute a determined
company. Therefore, if Giggling brothers uses this system it will have more accurate figures and
projections for all departments(Jones and Robinson, 2012)..
Today, computerised accounting system are present in all areas of organizations. This
generalized implementation of IS has been carried out in many cases without the necessary
planning, partly because the necessary concepts are not sufficiently developed. The trend
towards open systems, global interconnection and consumers' desire to become independent from
manufacturers bring with them the need for a deeper study of IS before decision-making.

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Therefore, it is necessary to improve the planning of future implementations, the compatibility
between systems and the organization of personnel and the company(Gaither and Gaither, 2004).
.
In recent years, the exercise of audit and control activities in information technology has
supported a more than accelerated development of all other activities in the economy of a
country. This leads one to think that the tasks performed by them must be equally audited.
In modern organizations, like Giggling brothers, the mission of computerized accounting system
is to facilitate the achievement of its strategic objectives. To this end, a considerable amount of
resources are invested in personnel, equipment and technology, in addition to the costs derived
from the possible structural organization that often entails the introduction of these technologies.
This important investment must be constantly justified in terms of efficiency and
effectiveness(Greasley, 2008).. Therefore, the purpose to be achieved by an organization that
contracts the audit of any part of its IS is to ensure that its strategic objectives are the same as
those of the organization itself and that the systems provide adequate support to the achievement
of these objectives, both in the present and in its future evolution.
At present, both processes and systems have been automated within which accounting
information is integrated, ordered and presented to all departments. This integration is done
globally within the company, in this system are fed different factors such as production, storage
inventories, etc. Which provide accounting information necessary not only to make necessary
decisions, but also for the daily operation of the company(Greasley, 2008)..