Finance And Accounting (Coursework Sample)

FINANCE AND ACCOUNTING by Student’s Name Class/Course/Code Professor’s Name University/School City, State Date Finance And Accounting Profitability Ratios Gross margin is the company's net sales revenue minus its cost of goods sold. Profit margin = Net Sales/Gross Sales 2012 = 23100/387000 = 59% 2011 = 246000/375000 =65% 2010 = 247500/375000 = 66% Return on assets = Net income/Total assets 2012 = 7859/233400 = 3% 2011 = 26010/193500 =13% 2010 = 10200/160860 = 6% Debt Related Ratios Debt to equity ratios = liabilities(total)/Shareholders Equity 2012 = 1050149/128251 =81% 2011 = 79410/114390 = 69% 2010 = 72480/88380 =82% Debt ratio = total liabilities/ total assets 2012 = 128251/233400 =54% 2011 = 79410/193800 = 40% 2010 = 72480,160860 =45% Return Ratios Return ratios represent the company’s ability to generate returns to its shareholders. They include return on equity and return on assets. Return on equity = net income/stockholders equity 2012 = 7,859/105,149 = 7% 2011 = 26010/114390 = 22% 2010 = 10200/88350 = 11% CAC’s Comparative Financial Statements CUSTOM APP COMPANY INCOME STATEMENT FOR THE YEAR ENDED 30th JUNE 2012 2011 2010 Revenue From Sales and Services Sales Revenue $180,000 $252,000 $255,000 Service Revenue 210,000 136,000 135,000 Total Revenue 390,000 388,000 390,000 Sales Returns and Allowances 3,000 13,500 15,000 Net Revenues 387,000 375,000 375,000 Cost of Goods Sold 156,000 129,000 127,000 Gross Profit 231,000 246,000 247,000 Expenses Selling, General &Administrative Costs 178,314 131,036 132,794 Depreciation Expenses 30,000 24,000 24,000 Research and Development 9,000 36,000 54,000 Interest Expense 3,240 1,420 1,756 Bad Debt Expense 1,200 1,944 1,950 Computer Rent Expense _ 21,000 21,000 Income before Income Taxes 9,246 30,600 12,000 Provision for Income Taxes 1,387 4,590 1,800 Net Income $7,859 $26,010 $10,200 CUSTOM APP COMPANY BALANCE SHEET AT JUNE 30 2012 2011 2010 Assets Current Assets Cash and Cash Equivalents $15,000 $30,000 $24,000 Accounts Receivable 90,000 75,000 35,000 Inventories 39,000 28,800 17,460 Total Current Assets 144,000 133,800 76,860 Equipment 78,000 48,000 72,000 Other Assets 11,400 12,000 12,000 Total Assets $233,400 $193,800 $160,860 Liabilities and Stockholders’ Equity Current Liabilities: Account Payable $65,856 $43,500 $30,600 Taxes Payable 1,387 4,590 1,800 Other Accrued Liabilities 14,737 13,320 10,800 Total Current Liabilities 81,992 61,410 43,200 Long–Term Debt 46,259 18,000 29,280 Total Liabilities 128,251 79,410 72,480 Stockholders’ Equity: Common Shares 36,510 36,510 36,510 Retained Earnings 68,639 77,880 51,870 Total Stockholders’ Equity 105,149 114,390 88,380 Total Liabilities and Stockholders’ Equity $233,400 $193,800 $160,860 3(a) Calculate and interpret the change in CAC's gross margin (excluding service revenue). Gross margin is the company's net sales minus its cost of goods sold. Gross margin for 2011: $ 252,000 - $129,000 = $123,000 Gross margin for 2012: $180,000 - $156,000 = $24,000 The gross margin declined dramatically from 2011 to 2012 because there was low sales revenue recorded in 2012 compared to 2011, and I noticed that service was realized more in 2012 than in 2011. (b) Calculate the net profit margin of CACs and interpret them. Net gross margin for 2010 = $127,000/$252,000 = 50% Net gross margin for 2011 =$ 129,000/$252,000 = 51% Net gross margin for 2012 = $180,000/$156,000 86% Generally, the higher the gross margin, the better; CAC’s managed sales in 2012 compared to 2011 and 2010. Adjustments should be made to improve the cost of sales for CACs by dealing with operating, financing, and other costs. This paper recommends that the gross profit margin be consistent unless the company changes its business model. (c) CAC's accounts receivables have drastically changed over the past three years, raising concerns about how competent the company is in dealing with the receivables. This paper suggests that once the company escalates figures of accounts receivables over the years, the business needs to formulate better mechanisms for collecting them, which requires management to act. (d) The change of account receivables through the years affects the company's provision for doubtful debts. In the case of CAC, it is evident that bad debts in the year 2012 will be high due to increased accounts receivables, affecting the company's debt ratio . The financial ratios of CAC in 2012 will be affected since there was an increase in doubtful accounts from 2011, which will harm the company's financial ratios. (e) The Generally Accepted Accounting Principles require that inventory be recorded in the manner in which the company received it. When dealing with inventory, a company can use the first in, first out, last in, first out, or average method. This will assist the company in determining the best method to handle inventory once it acquires CAC. The inventory accounting policy will assist you in staying within the cost since the company will be able to determine which inventory came first and at what cost it was valued then. Also, the paper proposes that all inventory records should be kept to avoid cases of valuing inventory higher than its costs, which will hence indicate overstatement in the balance sheet. This paper recommends that if there is an overstatement of inventory in the balance sheet, it will reflect a health company where, in a realm sense, the company is struggling, but as a result of such errors, it will be deceived to acquire it. (f) Revenue from service contracts is recorded at the time of contract signing unless contracts extend for more than 12 months, in which case the revenue is recognized ratably over each month. Since revenues are recognized on the income statement when realized and earned, it reflects all the revenues realized within the year and will reduce the accounts receivable at the end of the year. CAC's revenue recognition policy is based on the revenue recognition principle, which allows it to be recognized when earned. This paper recommends that monthly revenue be more appropriate since it will allow for the proper recording of revenues attained in the year. (g) The amortization calculator will amortize debt and display a payment breakdown of interest paid, principal paid, and loan balance over the life of the loan. Loan amount $54000 Interest rate 6% Number of years is 3 Amortization of the loan for every year is $10.981.64 In 2012 and 2013, the principal amount required to be paid was; Amount paid per year (10981.64*3) =32,944.92 2013 fiscal year should be (54000-32944.92) = 21,056 CAC failed to correctly record the principal amount in 2013, indicating a high interest rate to be charged, affecting the income statement. (i) Financial ratios relevant to creditors such as banks are coverage credit analysis and leverage ratios. Leverage ratios compare the level of debt against other accounts on a balance sheet, income statement, or cash flow statement. They help credit analysts (bankers) gauge a business's ability to repay its debts. Common leverage ratios include a debt-to-asset ratio, an asset-to-equity ratio, debt an equity ratio, and debt a capital ratio. Coverage credit analysis ratios measure the coverage that Income, cash, or assets provide for debtor interest expenses. The higher the coverage ratio, the greater the ability of a company to meet its financial obligations. Coverage ratios include interest coverage ratio, debt service coverage ratio, and asset coverage ratio. Limitations of ratio analysis Ratio analysis compares information fro...