Financial Management System
Question 1:
(Total 4 marks)
Alhekma’s financial analyst gathered the following
information for its competitors so that it can assess and evaluate its own performance against that
of the competitors.
|
Ratios |
Alhekma |
Competitors |
|
Average collection period |
33.5 days |
27.9 days |
|
Total assets turnover |
2.3 |
3.7 |
|
Inventory turnover |
1.8 |
2.8 |
|
Quick ratio |
0.6 |
1.3 |
Required
Illustrate how Alhekmais doing relative to its competitors. (1+1+1+1= 4
marks)
|
Ratios |
Alhekma |
|
Competitors |
Evaluation |
|
Average
collection period |
33.5 days |
> |
27.9 days |
Bad, Performance
of its competitors is better it collects payment faster than Alhekma. |
|
Total
assets turnover |
2.3 |
< |
3.7 |
Bad, Alhekmaassets are generating less revenue per $ as
compared to its competitor |
|
Inventory
turnover |
1.8 |
< |
2.8 |
Bad, Alhekma inventory is sitting in racks
more than its competitor |
|
Quick
ratio |
0.6 |
< |
1.3 |
Bad, Alhekmahas less liquid assets to honor
its current liabilities |
Question 2:
(Total 9 marks)
The following are the comparative financial
statements for Eagle Company
|
Balance
Sheet December 31 |
|||
|
|
2017 |
2016 |
2015 |
|
Cash |
$ 30,000 |
$ 20,000 |
18,000 |
|
Accounts receivable (net) |
50,000 |
45,000 |
48,000 |
|
Other current assets |
90,000 |
95,000 |
64,000 |
|
Investments |
55,000 |
70,000 |
45,000 |
|
Plant and equipment (net) |
500,000 |
370,000 |
358,000 |
|
|
$725,000 |
$600,000 |
$533,000 |
|
|
|
|
|
|
Current liabilities |
$ 85,000 |
$ 80,000 |
$ 70,000 |
|
Long-term debt |
145,000 |
85,000 |
50,000 |
|
Total Liabilities |
230,000 |
165,000 |
120,000 |
|
Common stock, $10 par |
320,000 |
310,000 |
300,000 |
|
Retained earnings |
175,000 |
125,000 |
113,000 |
|
|
$725,000 |
$600,000 |
$533,000 |
|
Eagle
Company Income Statements For the Years Ended December 31 |
||
|
|
2017 |
2016 |
|
Sales revenue |
$740,000 |
$600,000 |
|
Less: Sales returns and allowances |
40,000 |
30,000 |
|
Net sales |
700,000 |
570,000 |
|
Cost of goods sold |
425,000 |
350,000 |
|
Gross profit |
275,000 |
220,000 |
|
Operating expenses (including income taxes) |
180,000 |
150,000 |
|
Net income |
$ 95,000 |
$ 70,000 |
Further information:
· Hint: you must compute dividends paid.
· The market price of Eagle’s common stock was as follows:
|
Year |
Market price |
|
2015 |
$7.00 |
|
2016 |
$7.50 |
|
2017 |
$8.50 |
Required
a. Determine the following financial ratios for 2016
and 2017.
1. Profit margin. (1 mark)
|
Profit
margin = Net income/Net sales |
|
|
2016 |
2017 |
|
70,000/570,000 = 12.28% |
95,000/700,000 = 13.57% |
2. Asset turnover. (1 mark)
|
Asset
turnover = Net sales/ Average total assets |
|
|
2016 |
2017 |
|
570,000/(600,000+533,000)/2 = 1.01 times |
700,000/(725,000+600,000)/2 = 1.06 times |
3. Earnings per share.(1 mark)
|
Earnings
per share = Net income/Weighted average common shares outstanding |
|
|
2016 |
2017 |
|
70,000/(30,000+31,000)/2) = $2.30 |
95,000/(31,000+32,000)/2 = $3.02 |
4. Price-earnings ratio.(1 mark)
|
Price-earnings
ratio = Market price per share of stock/earning per share |
|
|
2016 |
2017 |
|
7.50/2.30 = 3.26 times |
8.50/3.02 = 2.81 times |
5. Payout ratio.(1 mark)
Ø Difference in Retained earnings = 125,000 –
113,000 = $12,000
dividends paid for 2016 =
70,000 – 12,000 = $58,000
Ø Difference in Retained earnings = 175,000 –
125,000 = $50,000
dividends paid for 2017 =
95,000 – 50,000 = $45,000
|
Payout
ratio =Cash dividends declared on common stock/ Net income |
|
|
2016 |
2017 |
|
58,000/70,000 = 82.86% |
45,000/95,000 = 47.37% |
6. Debt to assets ratio.(1 mark)
|
Debt to
assets ratio = Total liabilities/ Total Assets |
|
|
2016 |
2017 |
|
165,000/600,000 = 27.5% |
230,000/725,000 = 31.72% |
b. After determining the above financial ratios, explain briefly whether
or notthe company experiences improvement in the financial position and
operating for the period from 2016 to 2017 (3 marks)
Eagle company's financial position has improved
from 2016 to 2017, at profit margin, assets turnover ratio and EPS from 2016 to
2017 are increasing, but the price earing ratio, payout ratio are decreasing
and suggest that in PER that investors may be looking less favourably at the
corporation and in PR which help its overall solvency and the debt to assets
ratio to reduce its debt burden as its debt to total assets ratio has
decreased.
Question 3:
(Total 5 marks: each point one mark)
Ibrahim is studying for his accounting
finalproject, summarize for Ibrahim the differences between financial
accounting and managerial accounting. (Use narrative arguments). (5 marks)
1. In case of financial accounting, the companies have to adhere to accounting
standards depending on the country. These standards could be in relation to the
presentation, frequency of reporting etc. But in case of managerial accounting,
no such standards need to be followed.
2. Financial accounting is to be used by both internal and external
parties including regulators, creditors, shareholders. Managerial accounting is
to be used by internal users (management) and not for external parties.
3. Financial accounting statements need to be prepared at the end of the
accounting period- every quarter and every year-end. Managerial accounting has
no definite time frame of preparation- this is done according to the
requirements of the management.
4. Financial accounting statement are required to be published and are
audited by auditors. There is no such requirement in the case of managerial
accounting.
5. Financial accounting is meant to look at the historical performance
and is hence backward looking. Managerial accounting is forward looking- it
focuses on creating and implementing strategic plans
Question 4:
(Total 9 marks)
The following
information is available for Tomlin Company.
|
|
January 1, 2020 |
2020 |
December 31, 2020 |
|
Raw materials inventory |
$21,000 |
|
$30,000 |
|
Work in process inventory |
13,500 |
|
17,200 |
|
Finished goods inventory |
27,000 |
|
21,000 |
|
Materials purchased |
|
$150,000 |
|
|
Direct labor |
|
220,000 |
|
|
Manufacturing overhead |
|
180,000 |
|
|
Sales revenue |
|
910,000 |
|
|
Selling expenses |
|
50,000 |
|
|
|
80,000 |
|
Required
a. Determine cost of goods manufactured. (3 marks)
b. Prepare an income statement (3 marks)
c. Describe the differences betweenmerchandising and
manufacturing companies with respect to income statement and balance sheet. (3
marks)
a.
|
Tomlin Company |
||
|
Statement of Cost of Goods Manufactured |
||
|
Direct Materials Used |
|
|
|
Raw materials beginning |
21,000 |
|
|
Add: Purchases during the year |
150,000 |
|
|
Raw materials available for use |
171,000 |
|
|
Less: Closing Inventory of Raw Materials |
30,000 |
|
|
Raw Materials used in Production |
141,000 |
|
|
Add: Direct Labour Hours |
220,000 |
|
|
Manufacturing Overheads |
180,000 |
|
|
Add: WIP Beginning |
13,500 |
|
|
Less: Closing WIP |
17,200 |
176,300 |
|
|
||
|
Cost of
Goods Manufactured |
|
537,300 |
b.
|
Tomlin Company |
||
|
Income Statement (Partial) For the year ended December 31,2020 |
||
|
Sales |
|
910,000 |
|
Cost of goods sold: |
|
|
|
Finished goodsinventory, Jan 1 |
27,000 |
|
|
Add: Cost of Goods Manufactured |
537,300 |
|
|
Cost of Goods available for sales |
564,300 |
|
|
Less: Finished goods inventory, Dec31 |
(21,000) |
|
|
Less: Selling expenses |
(50,000) |
|
|
Less: Administrative expenses |
(80,000) |
|
|
|
|
(413,300) |
|
Net Income |
|
$ 496,700 |
c.
|
Differentiation of |
Income Statement |
Balance Sheet |
|
Merchandising & Manufacturing |
merchandising company
computation of cost of goods solder placed by purchases. Bet manufacturing
cost of goods soldreplaced by Manufactured. |
merchandising company
shows just one category of inventory. But manufacturingshows three (finished
goods inventory, work in process inventory, and raw material inventory). |
Question 5:
(Total 13 marks)
The controller of Rather Production has collected the following
information
|
Sales (100,000 Units) |
$1,600,000 |
|
Selling expenses |
$250,000 (40% variable
and 60% fixed). |
|
$490,000 |
|
|
Direct labor |
$290,000 |
|
Administrative expenses |
$270,000 (20% variable
and 80% fixed) |
|
Manufacturing overhead |
$380,000 (70% variable
and 30% fixed). |
Required
a. Determine (1) the contribution margin and (2) the
fixed costs. (2+2=4 marks)
b. Determine the break-even point in (1) units and (2)
dollars. (2+2=4 marks)
c. Determine the sales required in dollars to earn net income
of $200,000. (2
marks)
d. Assume that Rather Production meets its target net
income, what is the margin of safety ratio. (3 marks)
|
Selling expense variable (250000*40%) |
100,000 |
|
Selling expense fixed(250000*60%) |
150,000 |
|
Administrative expense variable (270000*20%) |
54,000 |
|
Administrative expense fixed (270000*80%) |
216,000 |
|
Manufacturing overhead variable (380000*70%) |
266,000 |
|
Manufacturing overhead fixed (380000*30%) |
114,000 |
a) Contribution margin =
Sales - Selling expense variable - Direct materials - Direct materials -
Administrative expense variable - Manufacturing overhead variable
Contribution margin =
1,600,000 – 100,000 – 490,000 – 290,000 – 54,000 – 266,000 = $ 400,000
Fixed cost = Total
Cost-Variable cost = 1,680,000-1,200,000 = $ 480,000
b) Break-even Point (in
units)= Fixed cost/CM per unit = 480,000/(400,000/100,000) = 120,000 Units
Break-even Point (in
dollars)=Fixed cost/CM = 480,000/(400,000/1,600,000) =
$1,920,000
c) Required sales in
Dollars = (Fixed costs + target net income)/CM ratio
=(480,000+200,000)/(400,000/1,600,000)
= $ 2,720,000
d) Margin of safety
ratio = (Current Sales
- Break-even Point (in dollars))/ Current Sales
=
(2,720,000-1,920,000)/2,720,000 = 29.41%
*****
1. Project
Assessment Criteria
The assessment
of the project will be undertaken by the instructor.
Marks
distribution will be as follows:
Report
Body
2. Project
Submission Date:
This project is due on week 16; and it is an Individual
project. The
report should be uploaded using the (Moodle) ONLY before the due date.
3. Late
Submission Instructions:
All students must comply with the submission
deadlines.
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.
4. Format:
ü The cover page is important; please keep it in your
submission.
ü High similarity in the answers will affect your
marks negatively.
ü Follow the instructions that will be explained to
you in class by the instructors
USA 
India