Management Accounting Case Study: Fridge Freeze Plc

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Finance and Management Accounting
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Table of Contents
Introduction.................................................................................................................................................3
Part A..........................................................................................................................................................4
1...............................................................................................................................................................4
2...............................................................................................................................................................6
3...............................................................................................................................................................7
Part B...........................................................................................................................................................8
1...............................................................................................................................................................8
2...............................................................................................................................................................9
Part C.........................................................................................................................................................10
1.............................................................................................................................................................10
2.............................................................................................................................................................12
3.............................................................................................................................................................13
Conclusion.................................................................................................................................................14
Appendix...................................................................................................................................................16
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Introduction
This study is conducted to analyze the financial information of the various companies so that
applicability of the financial and management tools in prospective of the company is identified
by the management. Here the three parts are segregate for the company in which various
financial activities are conducted. During the part 1 financial ratio analysis is conducted which
assist in better judgments of the financial performance of the company and the next part break-
even model is used to resolve the financial issue so that applicability of the model is identified
with their assumptions used by the model. At the last theoretical discussion being conducted to
identify the importance of the tools and technique of budgetary control activities for decision
making of the company.
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Part A
1.
Financial analysis is the tool which can be used by the management for analysis of the financial
information of the company which assists in better decision making for the companies and also
guide for improving steps in the business process. Further, Financial ratio analysis finds out the
various ratio which can be helpful in better understanding of the financial performance of the
financial assets or the operational activities of the company (Corporatefinanceinstitute, 2019). To
ensure about adequate learning of the financial ratio analysis here the case study is taken in
which financial ratio is calculated on the financial statement of Fridge Freeze Plc so that
management can take the major decision for improvement.
Profitability Ratio
Profitability ratio is the tool which can be helpful for the management to identify the financial
performance of the company in terms of profitability. To evaluate the profitability of the
company here two ratios are chosen which helps management in the identification of the
performance of operations of the company and also guide return which is achieved by the
company on their financial sources in the production activities (Robinson et.al, 2015). As the
financial analysis is indicates that company is able to maintain 49% and 54% in both the year
and also guide that company had decline of the operating profit and further they are also able to
acquire return of 40% in 2017 and 25% in 2018 which reflects that there is major decline in net
earnings for the company.
Liquidity Ratio – This ratio reflects the stability of the cash and cash equivalent assets for the
company which helps management in cope-up with emergency liquidity crisis for the company.
Further, this analysis finds two major ratios which are quick and current ratio. The quick ratio
indicates that the company is not able to meet with their emergency requirement so that
management needs to take some of the strategic action to ascertain the stability for the company.
Further, Current assets ratio is 1.40 and 1.43 for a company which indicates the favorable
condition to the business activities.
Efficiency Ratio – Efficiency ratio identified the production effectiveness for the company in
the market and also provide details related to the optimum utilization of the resources of the
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company (Wallstreetmojo, 2019). To evaluation efficiency and utilization of the company is able
to rotate their stock or inventory in 93 days and also 96 days to recover the credit on the sales of
the goods in the market which can be unfavorable condition as the debtor always pays amount in
more than 3 months which block the cash or liquid rotation for the company and also increase
the major financial chances of liquidity crisis.
Gearing Ratio
Gearing ratio helps management in better control the debts funding and also provide assistance in
the evaluation of debts performance of the company. Gearing ratio for the company is 1.05 and
1.15 in both the year which indicates that the company had major long term debts in their
financial structure which can highly impact on the company's long term financial performance.
Further, in the last year, the company had an interest coverage ratio of 26.59 which is decreased
in 2018 and comes to 4.43 so that management need to concern about their financial cost in the
market.
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2.
Working Capital Cycle
The working capital cycle is the tool which helps management to identify the number of periods
which company need to rotate their working capital requirement and also guide management to
maintain their fund to finance their financial needs in routine activities(Klychova et. al., 2015).
Here the Fridge Feeze Plc wants to identify their working cycle period so that they can manage
their fund requirement of financial funding for supporting routine needs of production and
operational activities of the company.
From the study of financial information of the company, management can recognize that they
need financial fund in every 2 months or 60 days for financial support of their business activities.
Working capital requirement is occurs in every 2 months for their operational activities of the
company which indicates that company had favorable condition in terms of financial funding in
their business activities(Lyngstadaas et.al, 2016). Management need to investigate about the long
term time period of working capital requirement as it can directly be related to the operational
performance of the company.
The company also had major liquidity issue as the company working capital cycle concede more
time for their rotation and also quick assets of the company is not able to replay their current
liability. Management needs to consider quick action for their emergency requirement of the
cash.
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3.
Limitation of Financial Ratio Analysis
 Financial ratio analysis is not able to consider the contingent liability in the financial analysis
for the performance of the company. This can be a major drawback for financial ratio
analysis which can impact the result which arrived from the analysis.
 There is another major drawback of the tool which is financial ratio is not able to consider
the size of the business so many of the times result from financial analysis is favorable for
small business but not good for long term business activities (Mbuthia, and Omagwa, 2019).
 Financial ratio analysis does not compare the accounting policies which company adopted to
represent their financial information in income statement which can be some time biases for
the company and their stakeholder which take the decision based on ratio analysis.
 Financial ratio analysis is the tool which used historical data for the comparison and the
analysis for the company which can majorly hamper the result of the analysis as this data is
not relevant according to the changing environment of the company.
 Financial analysis is not able to consider seasonably and impact on inflation as this factor
many of the times highly impactful on the financial performance of the company in the
market but financial ratio analysis is not able to consider this point for a fair comparison
(Mbuthia, and Omagwa, 2019).
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Part B
1.
Break-even analysis – Break-even analysis is the tool which helps management to identify the
point of sales on which company can bear their fixed cost of the production from their sales
revenue (Nagarajan et.al, 2018). Further, this tools Helps Company to identify the volume of the
sales for the company which can be the point on which company can earn the margin of zero and
on a condition where the company is on no loss or no profit.
Break-even analysis indicates that the company needs to sold 32,000 unit in the year 2018 and
30,000 units in 2017 for the company so that management of the company can retain the fixed
cost of the company. Further, the sales volume of 9600,000 in the year of 2018 and 10800,000 in
the year of 2017 company need to earn so that they can afford their fixed cost and not beard the
financial loss from their production or operational activities (Mbuthia, and Omagwa, 2019).
The margin of Safety – Margin of safety is the amount which is higher than the value of break-
even for the production activities of the company and also indicates the margin in which
company can earn the financial profit for their business activities. The company can identify the
profit from their business activities by multiply PVR from the margin of safety and margin of
safety is calculated by subtracting a breakeven point from the sales which are performed below
in a financial problem of washbug limited.
Washbug limited had the margin of safety of 13000 in the unit for the year 2018 and 15000 for
the year 2017. Further, if the company want to achieve the profit from their business activities
than they need to determine the sales targets of 39, 00,000 for 2018 and 54, 00,000 for 2017 from
their business activities of the company (Mbuthia, and Omagwa, 2019).
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2.
Key Assumptions of Break-even model
 Break-even model segregated all the cost (production, selling and production) in fixed and
variable cost for the financial analysis All costs (production, selling and production) can be
segregated into fixed and variable components.
 Break-even analysis model always portraits a straight line graph in a linear presentation.
 Break-even analysis model assumed that total fixed cost of the product is fixed on all level of
production and variable cost is changed according to the changes in the output of production.
 The selling price of the goods remains to constrain for the company during the analysis under
break-even model (Mbuthia, and Omagwa, 2019).
 Under this model changes in the price of raw material, labor or other manufacturing expenses
is remain constraints.
 This model neglects all the other changes like technical, environment on the sales or cost of
production for the company.
 Revenue and cost of the company are compared to the common activities bases which can
impact on the financial performance of the company.
Many of the assumptions of break-even model are not relevant in the current conditions of the
market as it is not possible for the stable price of sales for the company in the market and also
many of the factor also exist in the market which can impact on the financial performance of the
company.
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Part C
1.
Financial managers of the company caused various financial sources for their expansion
strategies and also used many of the financial product of the expansion which exists in the
market for the company to fulfill the financial requirement of the company
(Efinancemanagement, 2019). There are many of the financial sources are exist in the market
which can be used by the management so some of the financial options are listed below which
can be used by the company for their expansion strategies.
External sources of the fund – External sources of fund for the company are the option from
which company can acquire the financial fund for the financial needs of the company for their
expansion strategies. Some of the financial are listed below for the company –
 Debts Financing
 Equity Financing
 Financial institution
Financial institution – Financial institution is the option which can be used by the management
of the company for their financial need in the market and also provide the major financial
product which can satisfy the emergency financial requirement of the company (Mbuthia, and
Omagwa, 2019). This option can be the most suitable option for the management as this
consumes less time in the acquisition of the fund for the business activities.
Internal Source of the fund – Internal source of the fund is the tool which is used by the
management so that they can generate quick cash flow to satisfy their expansion financial need
by the selling activities of the assets of the company. Many of the time this kind of strategies also
known as retrenchment strategies for the company in which they sold their segment of the
company and utilized in other parts to achieved sustainability in the market.
 Retains earning
 Reduction in the working capital
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 Sales of Assets
Sales of Assets - Sales of assets is the major option which is chosen by the management so that
they can be sold out the non-useful segment of the production so that company can utilize that
fund in the business activities. Further, the company can use that fund in their expansion
activities so that they can achieve more profit from their business operations in the market.
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2.
Budget – Budget is the financial tool or financial statement which includes the financial
information of future prediction of business activities for the company. This statement provides
various financial targets which can be helpful for the management of the company to monitor
and performance the financial activities shortly. Budgets are prepared by the management to
control the business activities shortly (Fool, 2019). Management can prepare many types of
budget for their business activities. Some of the budgets are listed below-
 Master Budget
 Operating Budget
 Cash Flow or Cash budget
 Financial budget
 Static Budget
 Production budget
Budget is the tool which interlinked strategic goals and objectives with production activities of
the company so that management can ensure their sustainability goals in the market (Mbuthia,
and Omagwa, 2019). There are some of the similarity in the strategic planning and the budget
which are mentioned below-
 Budgets are prepared for the financial planning for the future activities of the company and
strategic plans also provide the same statement which assists management in better business
activities shortly.
 Budgets are identified as the key targets for the business activities and strategic plans also
provide mission and objectives which management works to achieve shortly from their
business activities.
 Budget is also linked with the overall performance and business activities of the company
and strategic plans also monitor the overall performance of the company.
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