Efficiency Ratio of Investers

Question: Describe about the Report for Efficiency Ratio of Investers. Answer: 1.Rate of return on total assets = Net income/ Average total assets = 4362/ ( 29935 + 28045)/ 2 = 15.05 % Rate of return on ordinary shares = Net income/ Number of shares = 4362/7200 = 60.58 % Profit Margin = Net income/ Sales = 4362/ 55000 = 7.93 % Earnings per share = (Net Income Dividend on preference share)/ Number of shares = (4362 50)/ 7200 = 59.89 c Price earnings ratio = Market price of share/ Earnings per share = 12/ 0.59 = 20.04 Dividend yield = Earnings per share/ Market price of share = 0.59/ 12 = 3.13 % Dividend payout = Dividend per share/ Earnings per share = (2702/ 7200)/ (0.59) = 62.66 % Current ratio = Current assets/ Current liability = 12745/ 5780 = 2.21 Quick ratio (acid ratio) = ( Cash equivalent + account receivables)/ Current liability = (1645 + 4100)/5780 = 0.99 Receivables turnover = sales/ average Account receivables = 55000*2/ (4100 + 3675) = 14.15 Inventory turnover = sales/ average inventory = 55000*2/ (7000 + 6930) = 7.90 Debt ratio = Total debt/ total assets =15720/ 29935 = 53 % Times interest earned = EBIT/ Interest = (7830/ 1560) = 5.02 Asset turnover = Sales/ Average total assets = 55000/ (29935 + 28045)/ 2 = 1.90 (Chand, 2015) From the profitability ratios calculated, it can be seen that the profit margin of the company, earnings per share are higher than the industry averages. Thus the company is performing better than the competitors in terms of profitability and should work on ways to improve on return on total assets. In terms of liquidity, the current ratio and the quick ratio of the company is less than the industry average i.e. the company has less current assets and quick assets to clear the current liabilities which makes the company riskier. The company should increase the cash and thus its liquidity to pay the current liabilities efficiently. (Chand, 2015) The financial gearing is used to compare the debt and equity of the company and how much financial leverage the company has. It can be seen that the debt taken by the company is much higher than the prevalent industry averages which makes it riskier and cost of financing increases. Thus the company should reduce the dependency on long term debt and increase equity in the company. 2. Asset is something that can owned by the business. In the case of restaurant, the chefs are salaried employee and hence not considered assets. However if the company can bind the chef into a contract then the chef can become an intangible asset to the company. The value of the chef can be calculated by using the additional profits the company can generate due to the work done by the chef and taking the period of the contract into consideration to calculate the present value of the future cash flows. (i) Manager of human resources: The manager can use the accounting information to calculate the productivity of the company and understand the reasons how it can be improved so that the employees are motivated so that the firm can be more efficient in using its resources. Also the manager can use the accounting information to calculate the payroll and compare across industry to have understanding how the firm is performing within the industry. (ii) A factory manager: The factory manager can use the accounting information to find the inventory the company has and understand if the company is able to sell goods and determine the demand based on the inventory turnover ratio. The manager can also check the increase in cost of raw material, overhead cost, labor cost and find ways to keep them in control. (iii) The management team of an Australian Football League (AFL) club: The management team can use the accounting information to find out the amount of cash the club has and the players it can afford and prepare budget for the tournament it needs to play. They can understand the performance of the club in the past years and check if they have been making a profit or a loss and take corrective steps. (iv) The manager of a second-hand clothing charity: The manager of a second-hand clothing charity can use the accounting information to find out the money they were able to generate from the previous year and if their performance has improved or declined and can also find hoe much revenue it needs to generate to remain profitable. (Accounting Simplified, 2013) C). Purchase equipment for cash: In the Statement of financial position, the cash in the assets will decrease and non current assets will increase. The total assets will remain unchanged. In the cash flow statement cash will decrease. The Statement of financial performance will remain unchanged. Provide services to a client, with payment to be received within 40 days: In the Statement of financial position, the account receivables will increase and hence the total assets will increase. The income will increase and hence the equity. The Statement of cash flow will remain unchanged. Pay a liability: In the Statement of financial position, the cash will decrease from assets and account payable in liability will decrease. In the cash flow statement cash will decrease. The Statement of financial performance will remain unchanged. Invest additional cash into the business by the owner: In the Statement of financial position, the assets will increase and the equity will increase. In the cash flow statement cash will increase. The Statement of financial performance will remain unchanged. Collect an account receivable in cash: In the Statement of financial position, the account receivable will decrease and the cash will increase. Total asset will remain unchanged. In the cash flow statement cash will increase. The Statement of financial performance will remain unchanged. Pay wages to employees: In the Statement of financial position, the cash will decrease from assets and account payable in liability will decrease. In the cash flow statement cash will decrease. The Statement of financial performance will remain unchanged. Receive the electricity bill in the mail, to be paid within 30 days: In the Statement of financial position, the account payable in liability will decrease and expenses will increase in the income statement reducing retained earnings in the equity. The Statement of cash flow will remain unchanged. Sell a piece of equipment for cash: In the Statement of financial position, the assets will decrease and the cash will increase. Total assets will remain unchanged. In the cash flow statement cash will increase. The Statement of financial performance will remain unchanged. Withdraw cash by the owner for private use: In the Statement of financial position, the equity in the decrease and the cash in the assets will decrease. In the statement of cash flows, the cash will decrease in the financing activities. The Statement of financial performance will remain unchanged. Borrow money on a long-term basis from a bank: In the Statement of financial position, the long term liability will increase and the cash in the assets will increase. In the statement of cash flows, the cash will increase in the financing activities. The Statement of financial performance will remain unchanged. References White Claire. (2015). Why are efficiency ratios important to investors. Retrieved from https://www.investopedia.com/ask/answers/032615/why-are-efficiency-ratios-important-investors.asp Chand, S. (2015). Ratio Analysis: Meaning, Classification and Limitation of Ratio Analysis. Retrieved from https://www.yourarticlelibrary.com/financial-management/ratio-analysis-meaning-classification-and-limitation-of-ratio-analysis/29418 Investopedia. (n.d.). Profitability Ratios. Retrieved from https://www.investopedia.com/terms/p/profitabilityratios.asp MyAccountingCourse. (n.d.). Efficiency Ratios. Retrieved from https://www.myaccountingcourse.com/financial-ratios/efficiency-ratios MyAccountingCourse. (n.d.). Liquidity Ratios. Retrieved from https://www.myaccountingcourse.com/financial-ratios/liquidity-ratios Accounting-Simplified. (2013). Introduction to Accounting. Retrieved from https://accounting-simplified.com/financial/users-of-accounting-information.html