MBS544 Accounting Processes Semester 2: Ratio Analysis Report

This report analyzes the financial performance of Greta’s Furniture Private Limited through ratio analysis, comparing it with Furniture Mart and Furniture Bazaar. The report covers profitability (gross margin, net profit margin, and return on equity), solvency (debt to total assets), and liquidity (current ratio and inventory turnover ratio). The analysis reveals that Furniture Mart generally outperforms Greta’s Furniture. The report provides recommendations for improving Greta’s liquidity, profitability, and solvency. The conclusion emphasizes the importance of ratio analysis for evaluating company performance and making strategic decisions. The report is based on the MBS544 Accounting Processes module assignment. References from academic sources are used to support the analysis.

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Table of Contents
Question A...................................................................................................................................................3
Question H: Ratio Analysis.........................................................................................................................3
Profitability..............................................................................................................................................4
Solvency..................................................................................................................................................4
Liquidity..................................................................................................................................................5
Recommendation.........................................................................................................................................5
Conclusion...................................................................................................................................................6
References...................................................................................................................................................7

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Question A
Number Account Element Current/NC
101 Cash Asset Current
112 Accounts Receivable Asset Current
115 Commissions Receivable Asset Current
120 Inventory Asset Current
125 Office Supplies Asset Current
127 GST Paid Asset Other Current
130 Prepaid Insurance Asset Other Current
157 Equipment Asset Non-current
158 Accumulated Depreciation Liability Other current
160 Warehouse Asset Non-current
201 Accounts Payable Liability Current
211 GST Collected Liability Other current
270 Bank Loan Liability Non-current
301 P. Greta, Capital Liability Non-current
Question H: Ratio Analysis
Ratio analysis is technique or a tool that is required to analyze the overall position of the
companies and in this section Greta’s Furniture Private Limited, financial statements have been
analyzed in detail. The ratios are the parameters that are required to be analyzed by the company
so that the real position can be interpreted in the various areas. These areas can be named as

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liquidity, solvency, and profitability ratios and this will help in determining the overall position
with respect to the competitors such as Furniture Mart and Furniture Bazaar (Wang, et al 2016).
Profitability
The profitability ratio indicates how much profitable the business is and how well the
company is able to keep aside the profits to distribute among the shareholders or use it for the
potential investments. The profitability ratio is further bifurcated in the form of the gross
margins, net margins and return on equity. In this scenario Furniture mart is ahead of Greta as
the gross margins are highest at 27.63% in comparison to Greta and Furniture Bazaar. The gross
margins are lowest in case of Furniture Bazaar and this indicates that it is behind the two in the
league. The net profit margin is also taking most of the favor at 49.61% and in case of Greta its
lowest at -25.42%. This is because of the increase in the net operating costs that has resulted in
low net profits (Zhao & Li, 2015).
The return on equity on the other hand is the ratio which implies how much share will be
received by the shareholders and investors of the particular company. Mostly this is one of the
critical elements that have been used by the company and it is most favorite of the investors. The
return on equity is the ratio that describes the position of Greta at -35.40%, furniture Bazar at
23.17% and Furniture Mart at 29.68%. This implies that, Furniture Mart is taking care of its
shareholders. So overall in the case of the profitability Furniture Mart, has been ahead of all the
two companies. There are some strategies that could help Greta which can enhance the
performance of the company (Thompson, Strickland & Gamble, 2015).

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Solvency
The solvency ratios are thee ratios that determines how well the company has finance the
assets with the help of the debt. In this case the debt to total assets ratio have been analyzed in
detail. In case of Greta, the company’s debt ratio is 0.41 and the same is 0.44 in case of Furniture
Mart and Furniture Bazaar (Khan & Jain, 2018).
Liquidity
The term liquidity means how much cash is available to deal with the payment of the
current expenses prevailing in the firm. This basically is concerned with the capacity of the
company and the same is evaluated through current ratio and inventory turnover ratio. The
current ratio of Greta is 1.79 times whereas the same is 3.74 times for Furniture Mart and 3.79 in
case of Furniture Bazaar. In this section the lead has been taken by Furniture Bazaar as the ratio
is highest.
The current ratio implies the ability of the company to pay back the contractual
obligations on time (Edwards, Schwab & Shevlin, 2015). The inventory turnover ratio is
considered in this category as it affects the cash conversion cycle of the company. The inventory
turnover ratio reflects how well the company is able to collect the cash by selling of the
inventory. This would also indicate that if the cash is realized faster it can help in making the
payment of the current liabilities. The inventory turnover ratio of Greta is taking 98 days to
recover the inventory cash whereas it takes Furniture Mart to take 102.68 days to explore the
cash recovery. Furniture Bazaar has again taken a lead in case of the inventory turnover ratio at
85.54 days. This implies that overall Furniture Bazaar has won in case of liquidity parameter as
well as solvency (Zietlow, Hankin, Seidner & O'Brien, 2018).

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Recommendation
Key Tips to improve the overall position of Greta Limited have been outlined below with
respect to each parameter.
To improve the liquidity position the company shall get rid of the obsolete technology,
and the major focus of the company shall be on long term borrowings rather than the short term
borrowings.
For the purpose of setting a new profitability motives, the company must by reviewing
and evaluating the costs in detail and taking care of the raw costs. By boosting the existing
productivity and diversifying the customer base can be increased and the profitability will be
enhanced automatically (Robinson, Henry, Pirie & Broihahn, 2015).
The solvency position is sound and the company shall maintain such position in order to
keep a track of the funds and its utilization in the proper areas (Williams & Dobelman, 2017).
Conclusion
From the overall analysis it can be concluded that the, ratios analysis serves to be one of
the best techniques to evaluate the overall performance of the companies and the same can be
compared against the competitors to understand where the company stands. This also helps in
getting an insight of the potential as well as non-potential areas and therefore, company can
prepare the strategies keeping in mind all the possible factors. This would also mean that the
company is required to be proactive and work upon the improvement strategies as mentioned
above on an immediate basis.

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References
Edwards, A., Schwab, C., & Shevlin, T. (2015). Financial constraints and cash tax savings. The
Accounting Review, 91(3), 859-881.
Khan, M. Y., & Jain, P. K. (2018). Financial Management: Text, Problems and Cases, 8e.
McGraw-Hill Education.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
Thompson, A., Strickland, A. J., & Gamble, J. (2015). Crafting and executing strategy: Concepts
and readings. McGraw-Hill Education.
Wang, X., He, F., Yang, H., & Gao, H. O. (2016). Pricing strategies for a taxi-hailing
platform. Transportation Research Part E: Logistics and Transportation Review, 93,
212-231.
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book
Chapters, 109-169.
Zhao, D., & Li, Y. R. (2015). Climate change and sugarcane production: potential impact and
mitigation strategies. International Journal of Agronomy, 2015.
Zietlow, J., Hankin, J. A., Seidner, A., & O'Brien, T. (2018). Financial management for
nonprofit organizations: policies and practices. John Wiley & Sons.