Pampers Health Spa Company - Assignment Example

ACCOUNTING Here of Task Pampers Health Spa’ (PHS) Company Trading: Profit and Loss Account For the year ending 31st December 2009 £ £ Sales   2965000 Less: Cost of goods Sold Opening Stock as at at 1st January 2009 57300 Add: Purchases 49400 Cost of goods Available for sale 551300 less Closing Stock (67600)   Cost of Sales 483700 (483700) Gross Profit   2481300 Less: Expenses Motor Expenses 8900 Insurance 28700 Rates 20400 Premises 1680000 Wages and Salaries 1445000 Repairs & renewals 54700 Professional charges 17500 Advertising 67000 Total Expenses (3322200) Net Loss (840900) Pampers Health Spa’ (PHS) Company Balance Sheet As at 31st December 2009 Assets £ £ £ Long term Assets Fixtures and Fittings & equipment 275000 Motor Vehicles 26000 Total Fixed Assets 301,000 Current Assets Stock 67600 Bank 33000 Trade Debtors 31000 Total Current Assets 131600 Total Assets 432600 Liabilities and Owner’s Equity Owners’ Equity Capital 1360000 Net Loss (840900) Total owner’s Equity 519100 Current Liabilities Trade Creditors 45500 Drawings (132000) Total Current Liabilities (86500) Total Liabilities and Owner’s Equity 432600 Format (Black, 2009) Task 2: Break-even point= fixed costs = £ 2325540 =£ 2325540 1 – (Variable Cost / Sales)] 1 - 0.499 0.501 Break-even point= £ 4641796.41 (Atrill & McLaney, 2011) Margin of safety % = Current sales level – Break- Even Point Current sales level Margin of safety % = £ 2965000 -£ 4641796.41 = (56.55) % (Atrill & McLaney, 2011) £ 2965000 Task 3 Payback period method Proposal 1 The project requires an investment of £900,000 and it generates cash as follows: £270000 in Year 1; £295000 in Year 2; £345000 in Year 3; £325000 in Year 4. The payback period is 3 years £270000+ £295000= £565000 in the first two years + £335000 of the £345000 occurring in Year 3). Payback period method= £270000+ £295000+£335000= £900,000 £335000/ £345000 =0.971 Payback period= 2+0.971=3 years Proposal 2 The project requires an investment of £ 750000 and it generates cash as follows: £160000 in Year 1; £189000 in Year 2; £225000 in Year 3: £254000 in Year 4. The payback period is 3.7 years £160000 + £189000 +£225000 = £565000 in the first three years + £78000 of the £254000 occurring in Year 4). £160000 + £189000 +£225000 +£78000= £750 000 £176000/ £254000=0.693 Payback period= 3+0.693=3.7 years Accounting Rate of Return Accounting Rate of Return =Average net income / Average investment (Davies & Pain, 2011) Proposal 1: Average net income =90000 + 98000 +75000 + 65000 = 328000/ £900,000* 100= 36.44% Proposal 2: Average net income = 60000 + 70000 + 95000 + 125000 = 350000/ £750 000 * 100 = 46.67% Net Present Value methods NPV= -Co + C1/1+r + C2/ (1+r) 2 +…+ C n / (1+r) n (Davies & Pain, 2011) -Co= Initial Investment, C = Cash Flow, r = Discount rate, n = Time Proposal1 NPV= £ (900,000) + £270000 / (1+0.893) + £295000/ (1+0.797) 2 + +£345000 / (1+0.712) 3+ £325000 / (1+0.636) 4 NPV= £ (900000) + £ 247865.60176 + £ 91353.8957 + £ 68755.2314+ £ 45368.2506 = £ (446,657.0206) Proposal 2 NPV= £ (750000) + £160000 / (1+0.893) + £189000 / (1+0.797) 2 + +£225000 / (1+0.712) 3+ £254000/ (1+0.636) 4 NPV= £ (750000) + £ 84521.9229 + £ 58528.4281 + £ 44840.3683 +£ 35457.0328 = £ (526652.2479) Total Expenses Fixed cost (70%) Variable cost (30%) £ £ £ Motor Expenses 8900 6230 2670 Insurance 28700 20090 8610 Rates 20400 14280 6120 Premises 1680000 1176000 504000 Wages and Salaries 1445000 1011500 433500 Repairs & renewals 54700 38290 16410 Professional charges 17500 12250 5250 Advertising 67000 46900 20100 Cost of Sales 483700 Total 2325540 1480360 Contribution ratio = Sales/ total variable cost = £1480360 / £2965000 =0.499 Task 4: In order to ascertain the financial position of Pampers Health Spa’ (PHS) it is necessary to carry out a financial analysis as it measures the financial performance of the enterprise in terms of profitability, leverage, and liquidity in its operations. As the management of Pampers Health Spa’ (PHS) undertakes the financial analysis of the company, there is a need to carry out calculation of the financial ratios (Chadwick, L, 2002). While using the figures indicated in the financial reporting statements, namely the trading profit and loss account and balance sheet it is possible to come up with the profitability, leverage, and liquidity ratios in order to carry out an evaluation of Pampers Health Spa’ (PHS) performance. Thereafter with the report of the financial analysis evaluation, the management will identify several actions, the company might undertake to improve its results and enhance its profitability levels (Atrill & McLaney, 2011). Since leverage ratios, indicate the firm’s ability to finance its obligation and its capability to generate income that can pay for the debts thus, the company should be able to meet its financial obligations over time (Black, 2009). Therefore, the use of debt/ equity ratio by the management of Pampers Health Spa’ (PHS) will assist in understanding the company’s means of financing its activity. Pampers Health Spa’ (PHS) debt/ equity ratio for the year 2009 indicates a ratio of 0.06360 is below the recommended level of 1.0, which elaborates its ability to meet its debt obligation, thus, they should maintain a low level of debt/ equity ratio. Profitability ratios are also an essential measure of the level at, which returns arises from investment through the return on assets, profit margin, return on equity ratios of a company. Through the DuPont decomposition of return on equity ratio, an indication of a declining ratio of - 0.6183 show how there has been a shortfall as the management of Pampers Health Spa’ (PHS) creates value for its capital investment (Chadwick, L, 2002). On the other hand, the return on assets ratio give a measure of how the assets are effectively and efficiently utilized in order to produce net profit as a result, the management can enhance the utilization of resources around the company. Pampers Health Spa’ (PHS) return on assets in the year 2009 indicates a declining ratio of - 1.9438 signifying that there was a decrease in the returns on the net profit from the assets, as they were not effectively utilized (Black, 2009). Since, the profit margin ratio measures the sales volume of a company in its products market Pampers Health Spa’ (PHS) ratio in the year 2009 stands at 0.28361 indicates that the company management need to increase in its sales effort so as to achieve an increase in sales productivity levels. An analysis of the liquidity ratio indicates that the profitability measures effectiveness and efficiency of the firm’s performance in terms of current ratios, quick ratios, and working capital ratios. Through the liquidity ratios, there is an indication of the overall liquidity of a company in terms of business short-term solvency thus, its ability to pay back its debts as it runs its business operations (Atrill & McLaney, 2011). Current ratios comprise of cash and current assets a firm expects to turn into cash within the period of approximately a year (Chadwick, L, 2002). According to the annual financial reports of Pampers Health Spa’ (PHS) in the year 2009, the current ratio recorded was 0.6573 indicating that the firm has the ability to, meet its short-term obligations indicating progress in asset management that allows movement of cash flow thus enhances growth and prosperity. As the quick ratio indicates, the firm’s ability to pay debts it also shows the difference in liquidity between account receivables and inventory. Pampers Health Spa’ (PHS) reports a quick ratio of 0.7399 in 2009, this shows that the company has enough current assets apart from inventories to enable it pay for its short-term obligations when they fall due (Chadwick, L, 2002). Nonetheless, the net working capital in 2009 indicates a ratio of 0.34271, which indicates that the current assets of the Pampers Health Spa’ (PHS) are more as compared to the current liabilities. As a result, the company has favorable liquidity levels and can therefore, service debts as, and when they fall due, especially those that have short-term obligations. Undertaking an appraisal for the two concurrent projects involving building of either a leisure complex or meetings and conference centre it is critical for the management to consider the results of the performance appraisal method besides other external and internal factors (Atrill & McLaney, 2011). Considering the payback period the proposal of a leisure complex becomes viable as it takes three years to payback the initial cost while the meetings and conference centre project takes three years and seven months to repay the initial cash outlay (Davies & Pain, 2011). However, using the accounting rate of return appraisal method project 2 that involves the meeting and conference centre is worthwhile as it has a higher percentage of return rates of 46.67% as compared to 36.44% accounting rate of return of the leisure complex business. Since, the net present value calculation of both projects indicates, a negative value it could mean that there is no need to undertake either of the two projects as it indicates a shortfall of cash flows when the financial charges will be met using the present value terms (Davies & Pain, 2011). The management should consider other factors that will support the undertaking of either of the two business proposals. Firstly, the management of Pampers Health Spa’ (PHS) should take advantage of its location as it is only ten miles from Birmingham City Centre as compared to its two rivals who are twenty miles away from the city centre. In addition, the fact that the facility is close to the city it should look out in improving its services to cater for meetings and conferences for clients from corporate business within surrounding businesses as it also has an extra thirty percent occupancy room for extra customers. Even though the project of establishing a meeting and conference centre seem not viable the management should consider its ability to offer quality service and a luxurious environment for relaxing for business people and reconsider increasing its range of packages to offer to groups. With research, indicating that the company has price elasticity of demand of two the management should consider changing its price through attractive reduced packages to corporates since it would have a relatively large effect through an intensification in the quantity of a good demanded thus, increasing its income and profitability levels (Atrill & McLaney, 2011). The management should also consider other business venture that will utilize the extra space it has since it can use marquees for special events such as weddings or fashion shows therefore, increasing its income. As the breakeven analysis gives the quantity of output, whereby the company makes zero earnings even before accounting for interest and taxes it is necessary for every growing company to look out for a breakeven point where it can make out profits. Through the breakeven analysis, a company accrues several benefits including the ability to make sound financing decisions on investments it intends to undertake in order to enhance its profitability levels. This is through the ability of breakeven analysis to indicate the lowest output of business activity thus; management will make comprehensive decisions avoid losses (Gowthorpe, 2011). Break-even analysis is more beneficial to the company as it gives the firms cost structure that is useful to the management while undertaking partial budgeting, and need to use capital budgeting techniques for investment purposes as it gives capital expenditure analysis. In addition, the fact that break-even analysis indicates a clear relationship between cost, volume, production, and returns is necessary for labor costs estimation (Atrill & McLaney, 2011). In some instances break even analysis assist in pricing policy as it indicates revenues that will affect break even points, and profit levels through analysis changes in variable cost, fixed cost, commodity prices. Figure 1: Break-even graph (Gowthorpe, 2011). With a uniform break-even graph as one in figure, one above the company’s management can establish a point whereby it sales levels should stand at thus, avoiding losses as much as possible as it uses various techniques including offers and sales promotion to increase its sales volume (Atrill & McLaney, 2011). On the other hand, the company can seek to reduce its variable cost to minimal levels in order to ensure that at different sales levels it enjoys increased economies of scale. Variation of prices as the price elasticity of demand exceeds one indicates an increase in the sales volume thus, allowing the company to increase its sales revenue by utilizing the facility therefore, making profits. Without a doubt, Pampers Health Spa’ (PHS) company still has an opportunity to increase its profits and undertake expansive growth with its ready market, low competition, strategic position and high quality facilities. Bibliography Atrill, P. & McLaney, E. (2011) Accounting & Finance for Non-Specialists – 7th Edition. Harlow, England New York: Prentice Hall Financial Times. Black, G. (2009). Introduction to accounting and finance. Harlow, England New York: FT Prentice Hall. Chadwick, L. (2002). Essential finance and accounting for managers. Harlow, England New York: Financial Times Prentice Hall. Davies, T. & Pain, B. (2011) Business Accounting and Finance – 3rd Edition. Harlow, England New York: Pearson/Financial Times Prentice Hall. Gowthorpe, C. (2011) Business, Accounting & Finance – 3rd Edition. London: Thomson Learning Appendix Liquidity ratio Current ratios = current liabilities/ current assets = 86500 = 0.6573 131600 Quick ratio= current assets- inventories/current liabilities = 131600 - 67600 =64000 =0.7399 86500 86500 Net working capital ratio=Current assets- Current liabilities/ Current assets = 131600 – 86500 = 45100 = 0.34271 131600 131600 Leverage ratio Debt to Equity Ratio = Short Term Debt + Long Term Debt/ Total Shareholders’ Equity = 86500 = 0.06360 1360000 Profitability Ratio Return on assets= Net income/ total average asset = (840900) = - 1.9438 432600 Return on equity=Net income/ average stockholders’ equity = (840900) = - 0.6183 1360000 Profit margin = Net income/ Sales = (840900) = - 0.28361 2965000 Read More