Accounting Decision for Billabong International Limited - Case Study Example

Accounting decision By: Written Report All parties concerned: Please find the financial statement ratios and calculations in the context of the company’s profitability, efficiency, liquidity, gearing (leverage) and investment performance for the years 2008 and 2009. The changes between the two years are compared, discussed, and explained to serve as a relevant and valid guide for any decision making activities. In terms of overall assessment, existing and potential equity investors (shareholders) will profitably benefit through dividend distribution as a consequence of investing additional scarce money resources into the company, Billabong International Limited. Prepared by: ________________________ Financial Statement Analysis • Demonstrated skill in identifying and calculating relevant ratios and other indicators: Profitability. Gross Profit Ratio 2009   2008   millions   millions           Gross Profit = 893,998.00   746,379.00   Net Sales 1,674,434.00   1,354,419.00           Answer = 0.53   0.55   The above computation clearly shows that the company generated a gross profit $746,379.00 that the company did financially well during the year 2008. On the other hand, the company only generated $893,998 gross profit for the year 2009. Based on the net sales of $1,674,434, the corresponding 53 percent gross profit ratio is a slight drop from the prior year’s 55 percent gross profit ratio. In terms of this ratio alone, the company did better in prior year, 2008, as compared to the current year, 2009 (Gowthorpe 2005;118). Net Profit Ratio 2009   2008   millions   millions           Net Profit = 152,839.00   17,146,000.00   Net Sales 1,674,434.00   1,354,419.00           Answer = 0.09   12.66   The above computation clearly shows that the company generated a net profit $152,839.00 for the year 2008 alone. This is 12.66 percent of the net sales of $1,354,419.00. This ratio shows that the company did financially well during the year 2008. Based on the 2009 net sales of $1,674,434.00, the company only generated $152,839 net profit for the year 2009. The corresponding nine percent net profit ratio is a material decline from the prior year’s 12.66 percent net profit ratio. In terms of this ratio alone, the company did better in prior year, 2008, as compared to the current year, 2009 (Brigham 2001;86). Efficiency. The efficiency ratios below indicate how time was used to maximize profits or in coming up with relevant and valid production and marketing management decisions. Accounts Receivable Turnover 2009   millions   Net Credit Sales 1,674,434.00   Average Accounts Receivable 353,917.50       4.73   The 2009 receivables turnover ratio computation above clearly shows that the company was very effective in granting credit terms to most of its clients. The computation indicates that receivables amount of $353,917.50 were turned over 4.73 times to generate the 2009 revenues of $1,674,434.00 (Stickley 1997; 274). Collection Period 2009   millions   365 Days 365.00   Accounts Receivable Turnover 4.73       77.15   The above computation clearly shows that the company took an average of 77.15 days to collect the Receivables for the year 2009 (Stickley 1997; 274). Days Sales Outstanding 2009   millions   Accounts Receivable x 365 days 147,881,575.00   Net Credit Sales 1,674,434.00       88.32   The above computation clearly shows that the company’s days sales outstanding were 88.32 times in terms of generating the net credit revenues of $1,674,434.00 in relation to the 2009 receivables of $147,881,575.00. Inventory Turnover 2009   millions   Cost of Goods Sold 780,436.00   Average Inventory 231,685.50       3.37   The above computation indicates that the company sold inventory 3.37 times to generate the cost of goods sold of $231,685.50 for the year 2009. Average Days to sell Inventory 2009 millions 365.00 2.39   152.88 The above computation clearly shows that the company took an average of 152.88 days to sell its inventory to generate the cost of goods sold of $ 780,436.00 (Drury 2005;373). Liquidity. Current Ratio 2009   2008   millions   Millions   Current Assets = 1,020,781.00   667,523.00   Current Liabilities 309,151.00   217,102.00           Answer 3.30   3.07   The above computation clearly shows that the company’s current assets of $667,523 is 3.07 times higher the current liabilities of $217,102.00 during the year 2008 alone. This ratio shows that the company will have enough current assets to pay its currently maturing obligations for the same year, 2008. Further, the company’s current assets of $1,020,781.00 is 3.30 times higher the current liabilities of $309,151.00 for the year 2009. This ratio shows that the company will have enough current assets to pay its currently maturing obligations for the same year, 2009. In terms of this ratio alone, the company did better in current year, 2009, as compared to the prior year, 2008 (Stolowy 2006;29). Acid Test Ratio 2009   2008   millions   millions   Cash + Net Accts Receivable + Marketable Securities = 738,092.00   431,157.00   Current Liabilities 309,151.00   217,102.00           Answer 2.39   1.99   The above computation clearly shows that the company’s quick assets (Cash, Net Accounts Receivable, and Marketable Securities ) of $738,092.00 is 2.39 times higher the current liabilities of $309,151.00 during the year 2009 alone. This ratio shows that the company will have enough quick assets to pay its currently maturing obligations for the same year, 2009. Further, the company’s quick assets of $431,157.00 is 1.99 times higher the current liabilities of $217,102.00 for the year 2008. This ratio shows that the company will have enough current assets to pay its currently maturing obligations for the same year, 2008. In terms of this ratio alone, the company did better in current year, 2009, as compared to the prior year, 2008 (Hansen 2006;528). Gearing 2009   2008 Total Debt 1043576   830358 Total Assets 2220512   2625461       Ans: 0.47   0.32 The above computation clearly shows that the company’s total debt of $830,358.000 is 0.32 times of the total assets of $2,625,461.00 during the year 2008 alone. This ratio shows that the company will have enough assets to pay its maturing obligations for the same year, 2008. Further, the company’s total debt of $1,043,576.00 is only 0.47 percent of the total assets amounting to 2,220,512.00 for the year 2009. This ratio shows that the company will have enough assets to pay its currently maturing obligations for the same year, 2009. In terms of this ratio alone, the company did better in current year, 2009, as compared to the prior year, 2008 (Weygandt 2005;597). Investment Performance. Return on Investment 2009   2008   millions   Millions   Net Income 152,839.00   176,380.00   Investment 659,012.00   316,317.00           0.23   0.56   The above computation clearly shows that the company’s net income of $176,380.000 is 0.56 times of the total equity investment of $316,317.00 during the year 2008 alone. This ratio shows that the company did profitably well during the same year. Consequently, above computation clearly shows that the company’s net income of $152,839.000 is 0.23 times of the total equity investment of $659,012.00 during the year 2009 alone. This ratio shows that the company did profitably well during the same year. In terms of this ratio alone, the company did better in prior year, 2008, as compared to the current year, 2009 (Helfert 1997;71). The company’s effectiveness in evaluated using economic performance is one of the benchmarks in financial statement analysis. The effectiveness of operating performance determines the ability of the enterprise to survive within the financial environment includes the company’s ability to convince moneyed persons to infuse their scarce money resources into the enterprise. In exchange the investors or creditors are expected to be repaid for the use of their money. The return on investment formula indicates whether the company was effective in the stewardship of the company’s assets and liabilities. A positive return on investment indicates that the company’s management is skilled, resourceful, creative, motivated, and innovative. The formula is used to evaluate the indispensable criterion of business success: the quality of management decision making activities (Helfert 1997; 71). REFERENCES Brigham, E. Fundamentals of Financial Management. Sydney: Harcourt Press, 2001. Drury, C. Management Accounting For Business. Sydney: Thompson Press, 2005. Gowthorpe, C. Business Accounting and Finance for Non Specialists. Sydney: Thompson Press, 2005. Hansen, D. Management Accounting. Sydney: Thomson Press, 2006. Helfert, E. Techniques of Financial Analysis. Sydney: Irwin Press, 1997. Stickley, C. Financial Accounting. Sydney: Dryden Press, 1997. Stolowy, H. Financial Accounting and Reporting. Sydney: Thompson Press, 2006. Weygandt, J. Managerial Accounting. Sydney: Wiley & Sons, 2005. Read More