Task 3

To complete this tasks of given assignment first the financial statement of Middle East College
must be illustrated, after that to interpret the content of a Middle East College trading and profit
and loss account and balance sheet, explaining how accounting ratios can be used to monitor
Middle East College's financial performance. Ratio analysis is among the ways in which
organizations evaluate that how they are doing business, and equate business with last year or
their rivals. Any organization primarily cares about its own profitability. Investors around the
world are bringing their capital into a company to gain a return on their investment in some
business type (Igben, 2009). In small and medium enterprises companies, shareholders have
partial director influence over their company operations. They themselves are and are
responsible for the gains and losses (Webb, 2010). Emekekwue (2013) uses the study of the
financial ratio as an interest ratio that can enable the consumer draw a decision about the need to
invest in a specific business. Such measurements can prima facie assist the investor in having an
overview into the institution's the running. To make these ratios useful, they must frequently be
analyzed whether there are any variations and equate them with their rivals as well (Nwoha,
2011). Ratio analysis of Middle East College is mentioned below;

1. Current ratio:

A current Ratio is usually reasonable slowed in line with the market norm or more progressive.
A current ratio could mean expanded threat of misery or defaults. Likewise, whenever a
specialist involves real high established peer association, it states that it might not be functioning
effectively through its doings. (Will kenton, 2019).

Acid test ratio can be calculated by given formula

current assets
Current ratio=
current liabilities

current ratio

Year current assets Current Liabilities Times

2019 26437 24272.33 1.0

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2018 32297 19264 1.7

The current ratio indicates that Middle East College was doing well because it was at its peak
margin but it has now reduced current ratio due to the current asset falling. This has endangered
the company due to inadequate resources to pay off debts when they are payable, particularly
where a high proportion of current assets consists of stocks. From the above ratio of Middle East
College, current ratio in 2018 is far higher by 0.7 ratios as contrasted to 2019. It ensures that
Middle East College has been willing to more quickly resolve or reach its existing obligations as
they come due in 2018 compared with 2019. Though, Middle East College needs more
improvements for making its financial position stable.

2. Acid test ratio:

A high acid-test ratio demonstrates better financial stability in the short term. The acid-test ratio
is much more restrictive than the current ratio, calculating almost the same aspect, as current
ratio eliminates product interest.

Acid test ratio can be calculated by given formula

total current assets−inventory

Acid Test Ratio=
Total current liabilities

Acid Test ratio

Year total current assets Total Current Liabilities Inventory Times

2019 26437 24272.33 4500 1.0

2018 32297 19264 3400 1.5

Middle East College’s acid test ratio in 2019 is lower but this should be strong as compare to
previous year 2018. The performance of Middle East College on how well it can settle its
liabilities has declined immediately by a ratio of 0.5 this means the performance of Middle East
College on trying to settle its liabilities is declining. This indicates that the efficiency of the
Middle East College at the end of 2018 was significantly higher than trade cycle of 2019.
Irrespective of size of College, the acid test ratio of Middle East College is not satisfactory as it

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has not reached the 1:1 threshold which is considered satisfactory. In the near future, as this can
cause various difficulties, like Middle East College couldn't be able to pay back its liabilities
once if fall due instantly.

3. Gross profit percentage:

The GP ratio is a productivity measure indicating the connection between gross income and
overall net sales revenue. It is indeed a common method for evaluating the business' operating
efficiency. The percentage is determined by the division of the gross income by net revenue.

Gross profit percentage is determined by following formula

Gross profit percentage=( gross profit / sales turnover)×100

Gross profit

Year Gross profit Sales turnover Percentage

2019 103987 182434 57%

2018 96192 165849 58%

Middle East College’s gross profit and sales turnover demonstrates that over the year the gross
profit has decreased. As the gross profit margin shows just that how much the Middle East
College handles its stock purchase. The gross profit in 2018 was 58% and in the next year it
becomes 57%.

4. Net profit percentage:

An increased profit margin suggests a more efficient business which manages its costs better

Net profit percentage=(net profit /sales turnover )×100

Net profit percentage

Year Net profit Sales turnover Percentage

2019 33,098 182434 18%

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2018 30,596 165849 18.4%

Net profit percentage of Middle East College indicates that a percentage of the Middle East
College has a high gross profit and a low net income, which means that the Middle East
College’s operating costs are set too high, because they spend too much income on needless
expenditures from their business. Such a situation would mean company must have to take any
action on their operating costs. In year 2019 net profit percentage was 18% and in the year 2018
is was 18.4%.

5. Return on capital employed;

The formula for calculating ROCE is given as

net profit before tax

ROCE=
total assets−current liabilities

Return on capital employed

Year profit before tax Total assets Current liabilities Percentage

2019 45,970 113371 24272.33 51%

2018 42,494 105894 19264 49%

ROCE of Middle East College indicates that there have been no investors who put money as
their percentage in their bank as low as 2018-2019. If the interest rate is higher than the ROCE, it
shows that the investor has put money in their business. ROCE is a good way to determine how
much the business is getting back from investment because it is best for measuring total
resources the business has available. ROCE of Middle East College in year 2018 was 49% and in
the year 2019 it was 51%.

6. Stock turnover:

Stock turnover demonstrates how several times an institute is selling and substitutes its stock of
products in a specified era.

The stock turnover ratio calculation is the price of products delivered determined by the total
product across the same time.

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Stock turnover=cost of goods sold / stock

stock trunover ratio

Year cost of goods sold stock Times

2019 78447 4500 17.4

2018 69657 3400 20.4

Stock turnover of Middle East College shows that more stock has been sold compared to
2018 and there is a higher stock turnover. Stock turnover has risen from 2018-2019, but stock
rates are kept low to the profitability of the company. Based on outcome mentioned above Stock
turnover from Middle East Institution, we may observe that it would have stronger stock
turnover in 2018 relative to the current 2019 trading season. Therefore, this specific business
college in the previous era had sold and exchanged stock several times relative to the current
trading cycle.

7. Debtor’s collection:

Debtor’s collection illustrates how a company raises its debt, and how it drops. That means a
Middle East College knows how long it is going to turn their credit sales into cash. That is about
how many days they'd bill for it.

Formula for calculating Debtor’s collection is given as

Debtors collection=( Debtors /sales)× 365

Debtors collectionratio

Year Debtors sales Times

2019 4100 182434 8.20 = 8 days

2018 2000 165849 4.40 = 4 days

Debtor’s collection of Middle East College illustrates how a company raises its debt, and how it
falls. That means a company knows how long it will take to turn their credit sales into cash. This
is about how many days they'd pay for it. In 2018 it was 4 days and in 2019 it was 8 days.

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 8. Assets turnover:

Calculating assets turnover ratio formula is

Assets turnover=sales revenue /total assets

Assets turnover ratio

Year sales revenue total assets Times

2019 182434 113371 1.6

2018 195849 105894 1.8

The turnover of assets is an efficiency ratio that calculates the capacity of organization to
produce revenue from its assets by comparing net sales with the average total assets. Assets
turnover of Middle East College indicates that the Middle East College has a bunch of money on
them but the as they fall in the next year meaning they are in risk. It is attributed to insufficient
cash-to-debt securities, when they come in. In year 2019 assets turnover was 1.6 and in 2018 it
was 1.8.

D2:

According to my aspect, although the Middle East College’s current ratio needs to be improved
for a better financial situation. I would recommend to Middle East College that there is more is
done for improving financial performance. As their current ratio is unsatisfactory, there might be
the following difficulties.

 Low value of current ratio demonstrate that Middle East College may have difficulty
fulfilling current obligations

Though current ratio can be improved by

 Current liabilities of Middle East College must be paid off as much as necessary,
preferably as early as feasible. It will reduce current liabilities and consequently
increases current ratio of Middle East College.

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The acid test ratio indicates the assets against the liabilities like the current ratio, but by
eliminating the stock from the current asset it shows that the company that it can fulfill its
liabilities without selling stock. According to me I would like to suggest that Middle East
College should take in to account and improve its Acid Test ratio so as it cannot face any
difficulties in repaying its current liabilities immediately when they fall due. There different
ways on how Middle East College can improve its Acid Test ratio and be able to pay back its
current liabilities on time once the fall due. One way for improving Acid Test ratio of Middle
East College should be to pay off current bills and, at same time, to boost revenue in such a
manner that cash is available. As the acid test ratio is comparable to the current ratio but does not
involve stock of current assets, similar behavior can raise the current ratio will boost it.

While Middle East College does not progress on its percentage of Gross Profit, this indicates that
it does not progress on the approach to handling the purchasing costs. I would therefore like to
recommend the Middle East College strengthen its methods of handling its purchasing expense
in order to further increase its gross profit margin. By increasing it sales Middle East College can
improve its gross profit. Middle East College will also increase its gross profit margin by
reducing its buying costs, because Middle East College can retain and hold its purchase costs
down while the production costs for the enterprise are small, thereby leading to higher profit
margins for Middle East College.

Since net profit percentage is low in year 2019 as compared to year 2018, I would like to
recommend that Middle East College stop needless expenditures that add and may impact
Middle East College's net profit margin, because the company can consider different methods of
minimizing the expenditures that the business spends on its everyday business operations.

There need even more enhancement on the ROCE of Middle East College for enabling and draw
further customers to invest in business company. As when they invest more it will improve the
development and growth of Middle East College. In fact, college should be able to effectively
carry out its business activity thanks to the funds it receives from investors to shape the
investments.

I will say that Middle East College should increase its stock turnover as it suggests whether the
company is functioning well enough. Since when rate is strong that means the College stock is

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going quickly so where the product turnover number is small that shows bad efficiency because
stock in that specific business enterprise is not running which implies the business is not selling
the stock accessible.

Based on debtor’s ratio, I want to suggest that Middle East College should improve the collection
period for its debtor. Since there are growing strategies the College may use to increase its
collection time. Middle East College may offer cash discount to promote timely payment by
customers.

On the basis of my analysis of assets turnover, I would like to suggest that Middle East College
did not allow successful use of its properties in comparison to the current period's market results
relative to the previous year 2018. Middle East College will allow good use of its assets to boost
its efficiency while contributing to the success and development of the business.

Task 4

For completing this task it is required to demonstrate the use of budgets as either a means of
exercising financial control of Middle East College, then to examine reasons why it is necessary

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to control costs to the budget and finally to evaluate the problems identified from un-monitored
costs and budgets.

P6

Middle East College's budget can be used to manage the organization financially in the following
manner. A Middle East institute has a managerial role that holds a person who is appointed as a
finance controller. An institute like that maintains a group of cost economists and auditors. The
budget indicates you when and how to spend money and how to get the profit. The management
of costs by Middle East College is very significant for the institute/ its financial capital. If an
organization does not control its costs efficiently it could also lead to considerable losses to its
revenues and it could lead to company being unable to cover its expenses any more. Costs and
budgets of Middle East College are strategically placed to ensure there are an investment / funds
available for crises. All of that is part of the balancing exercise.

The benefit of planning a budget would be that it alerts workers of the available expenses they
can spend on. This enables Middle East College to connect inside the institute and focus on the
mission without going over budget. It also helps an organization managers make strategic
decisions and address conflicts they may have.

Fixed costs are expenses the Middle East College needs to pay that don't change in a short time
span. As the sale or service of the commodity rises, the costs remain constant. Irrespective of
production rates, the same amount of money is paid out. Insurance, leasing, telephone bills and
ads etc. may include fixed costs. The costs that Middle East College will pay, but as production
increases they can change is variable cost. Variable costs could include the costs of
manufactured goods, production or branding etc.

It is necessary for every organization to know the variance analysis because it is recognized

because favorable when a Middle East College results are higher than anticipated. Since a budget
is an estimation of future, the actual output of the companies will be close to sums budgeted.
Actual production would never be exactly the same as the budget. It's going to come around, fall
short, or go over budget. Budget variances exist when organizations cannot forecast the future
with full precision. As a consequence, when budgets are created a certain variance should be
expected.

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Operation Budget cost Actual cost Variance

Sales 200,000 182434 -17566

Cost of goods sold 60,000 78447 18447

Total expanses 45,000 58,017 13017

Net profit 95,000 33,098 -61,902

Variance is calculated by subtracting budget cost from actual cost. The actual cost of goods sold
and total expanses of Middle East College ere more as compare to budget cost and actual cost of
sales are less as compare to budget cost. So, the actual net profit is very low as compare to
budget cost.

Break even charts for Middle East College

Organizations should allow use of expenditure break even analysis. As that is determined on the
basis of the manufacturing costs and the expected sale to be produced. This in turn will
help organization like Middle East College in determining how many goods they will have to sell
before they actually start making profits.

Year 2018

                 
  Break Even Sales Value Calculation  
   
               
    Sales £165,849 100%    
       
    Cost of Sales £69,657 42%    
       
    Expenses / Fixed Costs £92,029 55%    
               
               
    Gross Profit £96,192 58%    
       
    Net Profit £4,163 3%    

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    Break Even Sales Value £158,671    
               
                 

Year 2019

                 
  Break Even Sales Value Calculation  
   
               
    Sales £182,434 100%    
       
    Cost of Sales £78,447 43%    
       
    Expenses / Fixed Costs £98,290 54%    
               
               
    Gross Profit £103,987 57%    
       
    Net Profit £5,697 3%    
       
    Break Even Sales Value £172,439    
             

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One problem arises when there is a high fixed cost per element that is not regulated at budget.
Unless the organization doesn't really manage its budgeting expenses then they should spend
over or under, all of which would result in a net loss. When a company cannot properly manage
its budget and make it too costly to produce the product, they can go beyond the manufacturing
budget. One more problem occurs when it is weak cash flow that is not managed to budget. Bad
cash flow is when there are more outflows than inflows, due to weak budgeting as well. Since
costs are not managed by budget, the business would then need to figure out a way to raise the
inflow to offset outflow.

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M4:

There are a number of requirements need to make for certain amount of income. Bank
specifications, stockholder specifications, and partnerships with suppliers and consumers may
also be influenced by this. Middle East College needs to manage budget to hold the income at a
reasonable point. In order to reduce expenses, you need to handle expenses with clear knowledge
to the person that invests it. In addition, another explanation why costs are required for budget
management is because market share increases. By adequately managing costs, it would allow
institutes like Middle East College to raise their market share, because well when everybody
understands when costs are well regulated in a commercial enterprise as they would be able to
manufacture and deliver goods at a higher price, because though items are priced at a cheaper
price, that would draw interest to the industry because it contributes to an rise in the actual
products generated by Middle East College.

From the above table of budget and variance, we can see that if budget is not managed properly
it will leads to loss.

D3:

Unless costs are not properly managed it will have a significant influence on the company which
in some situations drives the company into debt. Businesses may wind up wasting more
resources than they have to invest by not controlling the costs. It in effect contributes to
unmaintained and defective machinery and other effects that can have a major impact on the
business. Among these implications may be salaries that cannot be charged to workers or at a
reduced cost as the corporation is struggling to pay down its obligations with some capital that
can be saved. For Middle East College, unmonitored expenses, including other expenses that are
not charged yearly or in other words accidental costs, may result in debt if such costs are not
adequately tracked from budgeting.

 Unmonitored costs might grow out of reach and the company can become more
dysfunctional, so either the income becomes adversely affected or the income turns
to loss.
 On the other side, if the expenses and expenditure were unmonitored, the opportunities
might be under review and entirely overlooked, as a consequence of which the

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 organization could invest less on the opportunity or may ignore the opportunity to trigger
harm.
 An issue found from unmonitored expenses and expenditures is indeed the adverse
market revenue variation. For a variety of factors, everything may be like everything, but
typically the rates are too high.
 Another thing was the additional money that was expended on salaries and bonuses. This
was attributed to the Middle East College's lack of adequate budgeting and the recruiting
of limited staff.
 One way to avoid this would be to spend more money on the research used to make up
the budget. They might also make employees more independent, making room for
redundancies that would then reduce this cost.

Cost and budget monitoring is a very important factor of every organization. As where there is
strong planning and cost management would lead to better market efficiency that will ultimately
lead to development and profitability of the sector.

D1:

Controlling budgets keeps business from getting into financial difficulties. To be effective, an

organization such as Middle East College must schedule its financial operations in advance. It
will forecast and anticipate its sales and expense and income using historical evidence from the
company's prior operations, and plan for potential developments. The Executive board has
ultimate accountability for the existing financial management schemes. Executive management
has the responsibility for the development and preservation of the internal financial monitoring
program. The controlled budget would enable College of the Middle East to see if it has the
financial capital to grow. The Budget therefore points out how much will agency needs to invest.

A company's most important resources are physical, financial, and human capital along with
skills, competencies, and skill. Businesses also need these tools to perform their activities. The
capital, if not properly handled, will contribute to a business failure. As a consequence, the firm's
properties are always liquidated. This involves implementing the policies and regulations of the
board of directors that will add management risks that expanded opportunities. This process
would enhance Middle East College’s reporting because it would insure that targets and budget

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strategies are realistic and achievable while retaining some ability to adapt. They will always use
budget schedules to insure that they have earned adequate revenue as they intend to reimburse
the loan for the mystery included.

Ultimately, easiest approach to boost a company's efficiency is how good the customer

experience to workers is. If customer support is strong, that implies the consumers will be
satisfied, and they will come to the shop and end up investing more money, making the company
more competitive.

Reference

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[Accessed 7 May, 2020].

WILL KENTON, 2019 Corporate Finance & Accounting [online] Accessible at:
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Igben, Robert O. (2009). Financial Accounting Made Simple. Lagos ROI Publishers [Accessed 8
May, 2020].

Emekekwue, P.E (2013). Corporate Finance Management. 5 th Revised ed; kinshasha:

AfricanBureau of Educational Sciences [Accessed 8 May, 2020].

Charles T Horngren, Srikant M. Datar, George Foster, 2006. Costs accounting, a managerial
perspective, Arc Publishing, Craiova. [Accessed 8 May, 2020].

Gheorghe D. Bistriceanu, 2001 Finances, banks and insurances thesaurus, Vol. I, Economica
Publishing, Bucharest [Accessed 8May, 2020].

Sorin Briciu, 2006 Managerial accounting, theoretical and practical issues, Economica
Publishing, Bucharest [Accessed 8 May, 2020].

Briciu Sorin, 2000 The Informational System regarding the management accounting and
calculation of costs in industry, Argus Publishing, Bucharest [Accessed 8 May, 2020].

Counselor 2008.accounting for public institutions, Rentrop and Straton Publishing, Bucharest.
[Accessed 8 May, 2020].

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Middle East College. (2019). Middle East College (MEC), one of the largest private colleges in
Oman. Retrieved 8 May 2020, from https://mec.edu.om/en [Accessed 8 May, 2020].

McAleese D. (2004) Economics for Business, 4th edn, Pren-tice Hall, Pearson Education,
Harlow [Accessed 8 May, 2020].

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