Financial Ratio Analysis of Smart Resort Ltd: A Performance Review

This report provides a comprehensive analysis of Smart Resort Ltd.'s financial performance, focusing on the application of financial ratios to interpret the company's financial statements for the years 2018 and 2019. It begins by explaining Generally Accepted Accounting Principles (GAAP) and their importance in financial reporting, along with identifying various users of financial statements and their specific information needs. The report then discusses the relevance of income statements, balance sheets, and cash flow statements to different stakeholders, such as loan creditors and trade creditors. Further, it outlines the components that supplement financial statements in an annual report and explains key financial reporting concepts like matching, business entity, and going concern. Finally, as the finance director of Smart Resort Ltd, the report interprets financial statements using ratios like net profit margin, return on assets, return on equity, and current ratio, comparing the company's performance across both years to provide insights into its financial health and operational efficiency. Desklib offers a wealth of study tools and solved assignments for students seeking to deepen their understanding of financial analysis.

Managing Financial
Resources in
Hospitality Industry

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Question 1. Explain the concept of generally accepted accounting principles? Discuss various
users of financial statements and assess the financial information that they need.................3
Question 2. The annual financial statements of companies are used by various parties for a
wide variety of purposes. Discuss which of the three statements of income, financial position
and cash flows would be of most interest to the following:...................................................5
Question 3. Describe the components that supplement the financial statements in an annual
report. Discuss financial reporting concepts?.........................................................................6
Question 4. Assume you are the finance director of Smart Resort Ltd. Using the information
provided below, interpret financial statements using appropriate financial ratios and compare
both year performances..........................................................................................................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial Accounting is a kind of accounting which is concerned with summary, analysis
and reporting of financial transactions related to a business. This type of accounting requires the
accountants to carefully prepare the accounts that are required to make financial statements.
These statements are then reported to the various stakeholders that have interests in the working
of the company (Monahan, 2018). Just like other professions, these are also governed by a set of
bodies and principles that form basis for governing the accounting statements made by the
companies. These principles help accountants work smoothly and present the data accordingly.
Accounting concepts are the foundation that lay an organized accounting system in an
organisation. This report helps know-how the need for economic control and accounting and the
way those help extraordinary users of accounting statistics. The report highlights the concept of
GAAP and one-of-a-kind financial statements. Calculations of various ratios and analysis of
those ratios is also finished following a brief reporting of same. The company taken for this
report is Smart Resort Ltd.
TASK
Question 1. Explain the concept of generally accepted accounting principles? Discuss various
users of financial statements and assess the financial information that they need.
There are different standards that are designed by different accounting bodies which can
be applied while preparation and reporting of the financial information. Generally Accepted
Accounting Principles (GAAP) are common set of accounting rules which includes the
conventions, rules and procedures necessary to followed while preparation of accounting
statements and reporting of same. GAAP mentions the accepted accounting practice at a
particular time (Ariyawansa, and Nanayakkara, 2021). These provide a standard to measure and
make financial presentations. US securities exchange board has adopted these principles which
means all the companies registered there have to follow these principles while reporting the
financial information. GAAP follows the rule-based accounting which means these are set of
rules which are required to be taken as they are and no amendments are allowed in this. Federal
Accounting Standards Advisory Board (FASAB) is the body which makes and regulates GAAP
all around the world.

There are different users of accounting information. These may be within the
organisation or outside it. These users use the information for diverse purposes. Thus the
statements should be made successful in such a way that provide to the needs of these users.
These users are discussed below.
Users of Accounting Information
 Management: These are the those who formulate and make plans for the future. They
plan consistent with the goals of the corporation. These users of the accounting data make
use of it to devise, manipulate and selection making. It allows them compare the overall
performance of the organization and function (Zeller, Kostolansky and Bozoudis, 2019).
It essentially allows them do their task better. Managers of an enterprise makes use of the
financial facts to track overall performance through budgets, and variances to check the
viability of standards set.
 Employees: These are the people working within the company with the goal to earn
profits and fulfil the organisational objectives. They use the accounting statistics to
decide the economic health and profitability of the business to guarantee their activity
protection, destiny remuneration, retirement advantages and other opportunities. They
particularly search for profitability of the enterprise in response to paintings performed.
 Owners: They are the people who have invested in the enterprise to earn dividends. They
are the vital factors of a business enterprise and groups usually look for ways to
maximize their income. They use this information to analyse the profitability of the
agency and returns on their investments. It gives them insights about the commercial
enterprise and its capability to pay dividends for his or her investments. It also facilitates
them determine future direction of action.
 Creditors: These are users who've given mortgage to the business. They are fascinated to
determine credit score worthiness of the commercial enterprise. These includes providers,
banks, creditors of finance. It helps them examine financial function of the business and
if they could amplify any loans to them (Lessambo, 2018). Trade lenders only want facts
related to short time frame than lenders.
 Investors: They need the accounting information as they want to ascertain the risk in
investing and the returns and plan accordingly how much amount and where they should
invest for better returns.

 Customers: They need the accounting information to ascertain the financial position of a
business, when they have long involvement in the business.
 Regulatory Authorities: They need to ascertain that the accounting information is in
accordance with the rules and complies with the law of state where the business is taking
place.
Question 2. The annual financial statements of companies are used by various parties for a wide
variety of purposes. Discuss which of the three statements of income, financial position
and cash flows would be of most interest to the following:
a) A loan creditor
A loan creditor is someone who expand loans and advances to the commercial enterprise
that's required to be paid back with the aid of the enterprise after the predetermined time period.
These finances are vital for the enterprise as those are used in day-to-day activities and
operations of the commercial enterprise (Pouliasis, Papapostolou and Visvikis, 2018). These
creditors need to significantly examine the performance of the commercial enterprise and how
they will be rewarded with the hobby and in what period will the main quantity be paid again. To
reduce the hazard of horrific money owed in the future these creditors perform a chance
assessment based on the monetary statements of the corporation. For analysing they take help of
the financial statements of the business and ascertain the performance of the business. Statement
of performance or balance sheet is one of the critical tool used by them to check the current
liabilities that the organisation holds and also the statement of cash flows to see at what rate the
company is able to pay back its obligations.
b) A trade creditor
A trade creditor is a person who supplies goods and services to the organisation which is
not yet paid for them. The company owes this amount to this supplier which is required to be
paid back in time. Trade creditor provide goods and services on credit after having known the
working of the business and in what time these amount will be paid (Reinganum, 1999). These
are generally paid within a year and forms the short-term liabilities of the business. Trade
creditors make use of the financial statements like statement of profit or loss and cash flows to
ascertain if the company is in position to be given goods on credit or not.

Question 3. Describe the components that supplement the financial statements in an annual
report. Discuss financial reporting concepts?
Annual report of any enterprises consists of various additives that gives specific insights to the
customers of those reviews. The most important issue of those report are the financial statements.
These statements consist of statement of earnings or loss, statement of financial overall
performance/ stability sheet and announcement of coins flows (Beaver, 1966). These vital
components are supplemented by some other issue that are notes to money owed. Notes to
financial statements elaborates the facts and figures that are written in a concise way in the
statements. These provide detailed information on the figures written in the statements.
Financial concepts are required to be in mind of any business while recording and
preparing the accounts for an organisation. If an organisation follows the concepts and have in
depth understanding about the same, it creates trust among the stakeholders and they would want
to engage with its business. Following are the accounting concepts that helps accountants work
effectively:
 Matching Concept helps in calculating profit or loss in the given period, it needs
to record all the expenses and equivalent incomes to establish accurate profit or
loss (Talha, 2021).
 Business Entity Concept says that by law, a business is a separate entity from its
owners. It can be sued and sue by its name. It prevents mixing of assets and
liabilities among business and its owners.
 Dual Aspect Concept says that for every debit, there is a corresponding debit.
The recording of transaction is done in dual aspect.
 Going Concern Concept says that the business is going to do its business for a
fairly long time and accounting should be done over a period of time. This
assumes that a business will not be forced to stop its business (Çelik and Arslanli,
2021).
 Cost Concept says that business assets are required to be shown at the cost price,
that is the price they were purchased in the books of accounts (Meiryani and et. al.
2021). The depreciation is reduced over a period but no account is given to
market growth.

 Realisation Concept states that profit should only be recorded when it is earned.
Advancement of any such profits should not be realised and should be shown as
liability. Profits should always be realised before going into the accounts.
 Money Measurement Concept says that only those business transactions, that
can be expressed in terms of money are recorded in the books of accounts.
Recording of other kind may be kept separately (Ustinova, 2020).
Question 4. Assume you are the finance director of Smart Resort Ltd. Using the information
provided below, interpret financial statements using appropriate financial ratios and
compare both year performances.
Ratio analysis is an important tool to interpret the financial statements of the business
(Mohammed and et. al., 2020). Financial Ratio Analysis is a tool in accounting which helps
managers analyse the financial information. Following are the calculations of accounting ratios
in response to Smart Resort Ltd.
1. Net Profit Margin measures how much net profit is generated as a percentage of
sales/revenue. The calculation of net profit for both the year is hereunder.
Net Profit= Net Income / Net sales * 100
For the year 2018 = 167914 / 5732145 * 100
= 0.029 * 100 = 2.92 %
For the year 2019 = 185370 / 7123189 * 100
= 0.026 * 100 = 2.60 %
2. Return on Assets is a profitability ratio which measures how much profit the company is
able to generate over its assets. The calculation of of Return on Assets for both the year is
hereunder.
Return on Assets = Net Income / Total Assets
For the year 2018 = 167914 / 2638862 =0.06
For the year 2019 = 185370 / 3179266 = 0.05
3. Return on Equity is a measure of company's financial performance, it gives insights as
to how much profits is it able to generate over the invested amount of shareholders'. The
calculation of Return on Equity for both the year is hereunder.
Return on Equity= Net Income / Equity

For the year 2018 = 167914 / 1094485 = 0.15
For the year 2019 = 185370 / 1656886 = 0.11
4. Current Ratio is a type of liquidity ratio which measures a company's ability to pay
short term liabilities. It is a ratio of current assets over current liabilities. Calculation of
Current ratio for both year is hereunder.
Current ratio= Current assets / current liabilities
For the year 2018 = 1786140 / 982480 = 1.8
For the year 2019 = 2064100 / 1265332 = 1.6
5. Debt-Equity ratio is a type of financial ratio which measures company's financial
leverage (Hasan and Taylor, 2020). It shows the proportion of debt and equity used in
financial model of the company. Calculation of debt-equity ratio for both the year is
hereunder.
Debt-Equity Ratio = Total liabilities / Equity
For the year 2018 = 1544377 / 1094485 = 1.41
For the year 2019 = 1522380 / 1656886 = 0.91
6. Times interest earned ratio is a measure of a company's obligation to meet its debt
payments. It compares the operating income of the company to its interest payments.
Calculation of times interest earned ratio for both the year is hereunder.
Times interest earned ratio = Earnings before interest, tax, depreciation and amortization /
Interest payment
For the year 2018 = 277662 / 21955 = 12.64
For the year 2019 = 323631 / 17370 = 18.6
7. Inventory turnover ratio is a measure of rate at which the company changes or sells its
stock of goods during a particular period. Calculation of inventory turnover ratio for both
the year is hereunder.
Inventory turnover ratio = Cost of goods sold / Average inventory
For the year 2018 = 4377690 / ( 1124642 / 2 )
= 4377690 / 562321
= 7.7
For the year 2019 = 5396923 / { ( 1340432 + 1124642) / 2 }
= 5396923 / ( 2465074 / 2 )

= 5396923 / 1232537
= 4.3
8. Average collection period is a ratio which calculates the average number of days the
clients take to pay their bills. It shows the potency of the business's credit and collection
policies. Calculation of average collection period is hereunder.
Average collection period = Accounts receivable / ( Net sales / 365 )
For the year 2018 = 203143 / ( 5732145 / 365 )
= 203143 / 15704.5
= 12.9
For the year 2019 = 221836 / ( 7123189 / 365 )
= 221836 / 19515.5
= 11.3
9. Accounts receivable turnover is the measure of efficiency at which the company
collects its receivables. It is the ratio of net sales to its average receivables (Abdel-Basset,
Ding., Mohamed, and Metawa, 2020). Calculation of accounts receivable turnover for
both the year is hereunder.
Accounts receivable turnover = Net sales / Average receivables
For the year 2018 = 5732145 / ( 203143 / 2 )
= 5732145 / 101571.5
= 56.4
For the year 2019 = 7123189 / { (221836 + 203143) / 2 }
= 7123189 / ( 424979/ 2 )
= 7123189 / 212489.5
= 33.5
(b) Write a brief report to Smart Resort Ltd CEO regarding company performance
The company is performing well on a wider perspective but there are specific areas that Smart
Resort Ltd can work more efficiently. Having a study, the ratios, the net profit margins of the
company has decreased by 0.32% which suggests the organization was not able to generate
revenue which were more last year but additionally they decreased the net earnings margin
slightly in response to their income. The return on invested assets have also decreased in the
years by means of 0.01 which is negligible but organization need to focus on maintaining the

return in order that the difference does not go wider. Company has done wonders in decreasing
their debt-equity ratio this year they have issued more equity to the public. This has reduced
tensions on surviving on extra debt than equity. The interest earning ratio were elevated
significantly over the last 12 months which means that the interest paid by means of the
organization has decreased because of reduction money owed and rise in operating profit this
year. Overall, the corporation is performing nicely within the market but there are a few points
that wishes to be addressed like increasing the dependence on equity rather than debt or
recuperating extra from the assets of the firm.
CONCLUSION
From the above report it has been concluded that managing financial resources in a hospitality
industry is an important concept. The report highlights how accounting concepts help in
maintaining and reporting the financial information. The report has also highlighted how
different users of accounting information analyses and make use of different ratios in decision-
making. Different accounting ratios have also been calculated and reported to the CEO of Smart
Resort Ltd.

REFERENCES
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