Accounting Assignment

Assignment Task

Students are required to complete the computerised accounting practice set by Pabst and Perrin (2014) for ‘e-Generation’ on an INDIVIDUAL basis for accounting transactions up to Period 1. Students MUST print all their INDIVIDUAL Session Reports and follow the additional instructions listed below.

When setting up the company, students are required to enter their own names and student numbers into the address section. Refer to page 9 of the ‘e-Generation’ practice set. Currently says For example, replace with 720 Anzac Highway Glenelg SA 5045

Tricia Ong (put your own name) Student Number: 20156789 (put your own student number)

2) Students MUST print out Session Reports at the completion of ALL MYOB sessions and include these in an Appendix to the final report.

A session report is different from a MYOB financial report. A sample copy of a proper SESSION REPORT can be found on Blackboard. A session report should indicate the student name and student number. It has the title ’Session Report’/ ‘Journal Security Audit’ (name of report may differ, depending on MYOB version used) and will indicate the date and time when the transactions are keyed into MYOB.

For those using the MYOB version that generates session reports: Students will be asked prior to exiting MYOB if they want to print a Session Report. You can print these reports immediately or saved as a PDF file to be printed later. Please note that Session Reports that are not saved CANNOT be recalled and reprinted at a later date as they record only the current session.

Introduction

E- generation is a novice retail company dealing with Smartphones and Accessories like covers, chargers, earphones and a multitude of other products. The company is based in Australia and purports to expand its operations in the future.

The report is an attempt to analyse the profitability, solvency, liquidity and efficiency of the company and recommend improvement areas to the owner. The business uses MYOB based reports and maintains it accounting records on the same system. The business is based in Australia and is pending listing on the Australian Stock exchange. The transactions were well journalized and posted to ledger in the first step so as to prepare the Balance sheet, Income statement and Supplementary schedules. The analysis is followed by an overall conclusion on the areas analysed above and recommendations have been made accordingly.

address section.

In order to analyse the profitability, solvency, liquidity and efficiency of the business and make recommendation to the owner, a ratio analysis has been attempted to get a clear idea of the financial performance and position of the E- Generation business.

Liquidity

The Liquidity ratios will give an idea of the capability of the business to meet its short-term obligations. To be noted that Inventory being less liquid compared to cash has been deducted from current assets to arrive at the quick ratio. The ideal current ratio is 2:1 and ideal quick ratio is 1:1 which indicates capability regarding future obligations. The business is capable to meet the current short term financial obligations as and when they arise as computed in Table 1. The Cash to Current liabilities and Cash to Current assets ratio of 0.43 and 1.03 indicate that cash is sufficient to meet the current obligations even though it does not form a huge % of the total assets of the company. The current ratio of 2.42 indicates that the business covers the current liabilities 2.42 times of its current assets and is even better than the ideal 2: 1 standard. The net working capital computation for the company is positive and satisfactory at $ 48573.55

The liquidity position is satisfactory.

Profitability

The profitability analysis (Table 1) of the business shows 22% Return on assets and 47% Return on equity. The return to debt of 43 % also appears reasonable. The Return on assets ratio is indicating that the assets are being effectively utilized to earn profits for the company implying a profit of 0.22 for each dollar of asset. The Operating profit ratio and profit margin each indicates a profit of 11% for each dollar of sale. The Operating cost ratio of 20% on revenue signifies a safe operating cost compared to the sales generated by the company. Analysis of the Revenue to assets and Revenue to equity signify that the company earns revenue 2 and 4.2 times for each dollar of assets and equity respectively.

The profitability position is satisfactory.

Efficiency

The efficiency of the business operations (Table 1) is reflected by the Inventory turnover of 13.24 and Receivables turnover of 15 which appear favourable given the nature of business of E- Generation. To be noted that the current inventory and receivables are used for the computations while the beginning period inventory and receivables are assumed to be nil; this being the first year of operation for the company. The turnover is also indicating reasonable good conversion of inventory and receivables to earn profits and revenue for the company.

Analysis of the Inventory collection period in sync with the Aged payables reports indicates that the inventory is converted into sales in about 55 days and the major chunk of payables are aged between 31 to 60 days. Both these parameters are in sync and point out to the need of the business to further improve in this area. The strength area is the total absence of slow moving or obsolete inventory. The Receivables collection period of 48.67 days read with the Receivables ageing report indicate major chunk of receivables aged 0 to 30 days. The strength area is the total absence of aged receivables and minimum existence of the possibility of bad debts. This is also a sign of improved efficiency of the management.

The efficiency position is satisfactory.

Solvency

The long term financial strength of the company is analysed using the solvency ratios (Table 1). The ratios help to assess the share of assets sponsored by the Owners and Debtors. The ideal Solvency ratio boasts of minimum debt signifying reduced risk, cost, and restrictions on owners. Solvency ratios basically indicate investors preference for buying stock whose returns exceed the cost of debt. The Debt-to-Equity Ratio of 1.10 indicates the company’s dependency on debt compared with owner’s funds. Since it is greater than 1, external debt exceeds the owner’s funds which increases the risk profile of the company. The Debt to assets computation of 0.52 further strengthens this claim indicating $ 0.52 of debt for every dollar of asset. The leverage of the company may make lenders and prospective investors shirk away. However, the interest coverage of 142.19 and times interest earned ratio of 143.19 indicate excellent ability of the company to generate revenue in order to meet its interest expense obligations.

The solvency of the company needs improvement.

Analysis of the Supplementary reports

The Reconciliation report (Annexure) is indicating the need for the business to maintain an efficient system of updating its Cash and other records clubbed with the need for an internal check devised within the system.

The analysis of the Inventory items list (Annexure) indicates that low value items like earphones and USB camera pads with leather smart covers occupy a major chunk of the inventory even though not in terms of value. E-pod, E-pad, Smartphones and Playbooks cover a major portion of the inventory value on hand. Since the nature of the business is such that the items run a high risk of obsolesce due to new products entering the market every now and then, the owner is advised to keep this low to avoid losses. Other Supplementary reports indicate satisfactory position and performance.

Conclusion

The business is capable to meet the current short term financial obligations as and when they arise. The liquidity position is satisfactory. The profitability position is satisfactory. The efficiency position is satisfactory. The solvency of the company needs improvement. Other Supplementary reports like Aged payables and receivables indicate satisfactory position and performance.

Recommendation

Physical verification of the inventory is very important to substantiate and further strengthen the Inventory analysis. The owner is advised to conduct this as an annual exercise each year.

The reconciliation report is indicating the need for the business to maintain an efficient system of updating of its cash and other records clubbed with the need for an internal check devised within the system.

Since the nature of the business is such that the items run a high risk of obsolesce due to new products entering the market every now and then, the owner is advised to keep this low to avoid losses. An analysis of the market demand and usage of inventory, models like EOQ (Economic Order quantity) will help him in the determination of the ideal inventory for his business.

The company is recommended to increase the cash component in view of the low Cash to current assets and current liabilities computations. A budgeted cash flow statement would aid decisions in this area

The company is recommended to compare these computations and statistics with the industry standards before reaching a conclusion. This would also aid in pointing out improvement areas.