FINAL PROJECT ACC 200
Part A: Financial Statement Analysis (16 marks)
Question 1: (6 marks)
Explain the bases of comparison for ratio analysis.
There a three main bases of comparison for ratio analysis:
- Past periods: It is a comparison made between the most recent and the past year. Also, the economic and political environment must be considered while doing the analysis.
- Planned performance: The actual ratios must be compared with the budgeted ratios. This will help the company analyses the differences and the measure if the company has performed as per expectations.
- Industry comparison: The ratio results must be compared with the industry ratios and against benchmark ratios. This is to ascertain how the company is performing when related to the industry performance.
Question 2: (10 marks)
ABC company specialized in food industry has selected the following information from its most recent annual report to be the subject of an immediate press release.
- Net income this year was $4.4 million. Last year’s net income had been $4.0 million.
- The current ratio has changed to 2.5 from last year’s 2.
- The debt/total assets ratio has changed to 4 from last year’s 3.
- The receivable turnover has changed to 7 from last year’s 5 times.
- The Return on Assets has changed to 13% from last year’s 14.8%.
- The company purchased 2 new machines.
Required: As a financial analyst, you are required to think carefully about what information above is good news for the business and what information is bad news. Justify your answer.
Good news for the business are as under:
- Defination of Net income: Net income (NI), also called net earnings, is calculated as sales minus cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses.
In our case Net income increased from 4 to 4.4 million when compared to prior year. It is a positive news for the company as the company’s profit after deducting all the expenses has increased by $ 4,00,000. So it is a good news.
- Defination of current ratio: Indicator of a firm’s ability to meet short-term financial obligations, it is the ratio of current assets to current liabilities.Though every industry has its range of acceptable current-ratios, a ratio of 2:1 is considered desirable in most sectors.
In our case current ratio is 2.5 times when compared to prior year which was 2 times so it is a good news for business as the company as more short term current assets to meet its short term financial obligations.
- Defination of receivable turnover ratio:The accounts receivable turnover ratio is an accounting measure used to quantify a company’s effectiveness in collecting its receivables or money owed by clients. The ratio shows how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or is paid
In our case receivable ratio has increased to 7 times when compared to 5 times in prior year which indicates that a company’s collection of accounts receivable is efficient and that the company has a high proportion of quality customers that pay their debts quickly. So it is a good news for company.
Bad news for the business are as under:
- Defination of Return on Assets: Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company’s management is at using its assets to generate earnings. Return on assets is displayed as a percentage. In our case ROA decreased to 13 % from 14.8% in prior year which is a bad indication as the business net income is decreased to its total assets when compared to the prior year so it is bad news.
- Defination of Debt/ Total asset ratio: Total-debt-to-total-assets is a leverage ratio that defines the total amount of debt relative to assets owned by a company. The higher the ratio, the higher the degree of leverage (DoL) and, consequently, the higher the risk of investing in that company. In our case Debt/total asset ratio has increased to 4 from 3 when compared to prior year which there is a high degree of leverage & which ultimately amounts to high risk. So it is a bad news for business/company.
Part B: Managerial Accounting (10 marks)
Question 3: (Total 10 marks)
1-A manufacturing company makes the products it sells. Identify and define the cost elements that are involved in manufacturing a product. Once the cost elements of the products have been identified, how is the cost of goods manufactured for a period determined? (5 marks)
2- The following data have been provided from the Morgan Manufacturing Company for the most recent period:
| Sales…………………………………………………………………….. | $30,000 |
| Purchases of raw materials………………………………………. | $9,000 |
| Raw materials inventory, ending………………………………. | $1,050 |
| Raw materials inventory, beginning | $1,400 |
| Utilities on factory ……………………………………… | $3,300 |
| Direct labor……………………………………………………………. | $3,00 |
| Administrative expense…………………………………………… | $2,000 |
| Selling expenses…………………………………………………….. | $1,200 |
| Work in process inventory, beginning………………………. | $900 |
| Salary of factory Supervisor……………………………………. | $4,500 |
| Work in process inventory, ending…………………………… | $1,200 |
| Finished goods inventory, beginning………………………… | $1,100 |
| Finished goods inventory, ending…………………………….. | $1,300 |
Required: Calculate the cost of goods sold. (5 marks).
Part C: The Cost Volume Profit Analysis (14 marks)
Cost of goods manufactured and cost of goods sold
| Raw material inventory purchased | $9000 | |
| Add: Beginning Raw material inventory | 1400 | |
| Raw material available | $10400 | |
| Less: Ending Raw material inventory | 1050 | |
| Raw material inventory consumed | $9350 | |
| Add: Direct labor | 300 | |
| Add: factory overhead: | ||
| Utilities o factory | 3300 | |
| Salary of factory supervisor | 4500 | |
| Total factory overheads | 7800 | |
| Total Manufacturing cost | $17450 | |
| Add: Beginning Work in process inventory | 900 | |
| Less: Ending Work in process inventory | 1200 | |
| Cost of goods manufacturing | $17150 | |
| Add: Beginning Finished goods inventory | 1100 | |
| Less: Ending Finished goods inventory | 1300 | |
| Cost of goods sold | $16950 |
- A.聽Cost of goods manufacturing = $17150
2.聽Cost of goods sold = $16950
Question 4: (total 6 marks)
A CVP income statement is frequently prepared for internal use by management. Describe the features of the CVP income statement that make it more useful for management decision-making than the traditional income statement that is prepared for external users.
Several characteristics of the CVP income statement makes it useful for internal decision making. The CVP income statement categorizes costs as fixed cost or variable cost instead of function. The behavior of costs in this way can help management in controlling the cots. The CVP income statement shows the contribution margin, instead of a gross profit. This helps the management in establishing the extent to which sales cover the fixed costs and analyze the effect on net income of change in sales or costs.
OR
the traditional income statement is prepared using the absorption costing method and the CVP income statement is prepared using the variable costing method. Under the traditional costing method the fixed manufacturing overheads are considered to be the product costs and included in the cost of goods sold. On the other hand in case of CVP income statement only the variable costs associated with the products is treated as cost of goods sold. Since CVP income statement calculates the contribution from the products the firm is able to take many decisions on the basis of the contribution margin of the products which is not possible in case of the traditional income statement prepared by the firm for external
Question 5: (total 8 marks)
XEMA Company estimates that variable costs will be 60% of sales and fixed costs will total $900,000. The selling price of the product is $5, and 500,000 units will be sold.
Instructions: Using the contribution margin:
(a) Compute the break-even point in units and dollars. (3marks)
(c) Compute the margin of safety in dollars and as a ratio. (3 marks)
(d) Compute net income. (2 marks)
Marginal cost statement
| Particulars | $ |
| Sales ( 500,000 × $5) | 25,00,000 |
| (-) Variable cost 60% of sales | 1500,000 |
| Contribution | 10,00,000 |
| (-) Fixed cost | 900,000 |
| Net income before tax . | 100,000 |
Ans – Break even point in units and in dollars
Units = Fixed cost / Contribution per unit
Contribution per unit = $10,00,000/ 500,000 units
= $ 2 per unit
Fixed cost = $ 900,000
= $ 900,000/ $2 = 450,000 units
Break even point in $ = Fixed cost / contribution × selling price per unit
= $900,000/$2× $5= $ 22,50,000
- b) Margin of safety in $ and in ratio
In $ = Total sales – Break even sales
= 25,00,000- 22,50,000 = $ 250,000
In ratio = Margin of safety / Total sales × 100
= $250,000/ $25,00,000× 100 = 10%
- c) Net income – $ 100,000 ( as calculated above )
Project Assessment Criteria
The assessment of the project will be undertaken by the instructor.
Marks distribution will be as follows:
Report Body 40 marks
- Project Submission Date:
This project is due on week15; and it is an Individual project. The report should be uploaded using the model before the due date.
Submission Instructions
Students are required to submit the report in soft copy also through the Turnitin system which is available online at https://lms.ectmoodle.ae
High “Similarity Index” will result in low marks for the project.
- Format:
- Page size: (A-4)
- Margins: Font: Times New Roman/ Arial
- Font size: 12
- Line-spacing – 1.5 lines
- Referencing- Harvard Style.
