Accounting Project

E/MBA Class of Nov

2022
Group #2
Shridevi sandiramourty.shridevi@gmail.com
Sandiramourty

Adebowale adedejiadebowalepeter@gmail.com
Adedeji

Estefanie Alvarez estefaniealvarez@gmail.com

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Accounting Project

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Accounting Project

Assumptions

Paid-In Capital: The stock of $750,000 is assumed to be issued as common stock with the par value being
equal to the common stock price, hence no additional paid-in capital. i.e., paid-in capital equals $750,000
Revenue recognition: Sales of whisky are assumed to be treated as revenue (not deferred revenue nor
any other liability).
Inventory/production costing methods: Inventory production began in 2018, but no sales took place in
2018. The first-in, first-out method (FIFO) was used when calculating the Cost of Goods Sold (COGS) and
none of the expenses in Exhibit 4 (refer Case Study material) were included in COGS. All costs related to
production were paid in Cash.
Expense categories: All costs listed in Exhibit 4 (refer to Case Study material) that fall under Selling,
General and Administrative expenses (SG&A) were Included as fixed costs and as operating expenses
Interest Expense: The interest expense is reported in the Income Statement, as a non-operating expense
subtracted from EBIT (Earnings Before Interest and Taxes) to derive Net Income, not as an operating
expense.
Operating Expenses: Assume that Fraser Adger will be paid in 2020 for $30,000 and won’t be included in
these statements.

Financial Ratio Analysis

The asset turnover ratio is 2.96 in 2019 it is higher than the mean Industry value of 0.94*. The company is
globally generating more revenue per dollar of assets than other distilleries in the sector.
The debt-to-equity and debt-to-asset ratios reduced from 0.067 to 0.063 and 0.063 to 0.059 respectively
between years 2018 and 2019, this is because of more equity funding and repayment of loans.For example,
the (D/E) ratios are low : 0.067 and 0.063. It means that less than 7% of Highland Malt Inc’s assets have
been financed with debt.
The current ratio and quick ratio increasing from 15.9 to 16.9 and 3.4 to 9.4 respectively show increasing
ease to pay short-term debts and liabilities. The leverage ratios (D/E and Debt to asset) are lower than 1. So,
the company has more assets than debts.
Indeed, the net margin is 2% in 2019 which is below the *Industry value (8.81%), so Highland Malt Inc is not
having a competitive advantage.
With a Return on Equity (ROE) increasing from -0.67 % to 6.29% between years 2018 and 2019 implies that
for every dollar invested, $0.063 was generated in 2019, this shows increasing profitability but is not
enticing for investors.
Finally, the working capital is positive in 2018 and 2019, which means that the company has a lot of
resources to invest, grow and expand.

Recommendations

Renegotiate Sales Commission: There should be a renegotiation with Spencer to include a discount in the
sales commission when there is a return of sold barrels.
Reduce Expense: From the Income statement, in 2019 only $55,000 of operating profit was generated
from a revenue of $2,500,000, this is because of the expenses. Reducing the Operating expenses and
SG&A will increase the overall net income generated.
Financial Leverage: To improve the performance ratios (ROE and ROA) that are low compared to the
Industry values, Highland Malt Inc can use more financial leverage. It can finance itself with debt and equity
capital. Indeed, the return on equity can be increased by increasing the amount of debt relative to its equity
capital. For example, Highland Malt Inc can use the financial leverage and the current resources to invest in
PP&E for equipment.
Increase Price: Another way to increase the performance is by increasing the price of a barrel. Indeed we
can notice a continuous increase in production cost (from $6000 per unit in January 2018 to $7500 per
unit in July 2019). Then, it’s totally logical that Highland Malt Inc increases the price of its product in the
future to have better performance.

*Financial Ratio Analysis: https://www.investing.com/equities/mackmyra-svensk-whisky-ab-ratios

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Accounting Project

Financial Ratio Analysis

Financial Value Value

Analysis Formula Year 2018 (2018) Year 2019 (2019)

CR=Current
Current Assets/Current
Ratio (CR) Liabilities 795,000/50,000 15.9 845,000/50,000 16.9

QR=[Current Asset
Quick - [845,000 -
Ratio Inventory]/Current [795,000 - 375,000]/50,00
(QR) Liabilities 625,000]/50,000 3.4 0 9.4

Return on ROE=Net
Equity Income/Total (5000)/[750,000 + 50000/[750,000
(ROE) Equity (5000)]*100 -0.67 + 45,000]*100 6.29

Return on
Asset ROA=Net (5000)/795,000*10 50000/845,000
(ROA) Income/Asset 0 0.63 *100 5.92

Net Net (50000/2,500,0

margin Income/Revenue 0 0 00)*100 2

Asset
Turnover Revenue/Total 2,500,000/845,
Ratio Asset 0/795,000 0 000 2.96

Debt-to
Equity
(D/E) D/E=Total 50,000/[750,000 + 50,000/[750,00
Ratio Liabilities/Equity (5000)] 0.067 0 + 45,000] 0,063

Debt-to Total
Asset Liabilities/Asset 50,000/795,000 0.063 50,000/845,000 0.059

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Accounting Project

Calculations:

Cash, Inventory, Retained Earnings, Sales Revenues, COGS, and Operating Expenses

Cash (2018) = Stock Sold + Bank Loan = 750,000 + 50,000 = $800,000

Cash(2019) = Inventory Sold * Price per Whisky Barrel = 240 * 10,000 = $2,400,000
Inventory(2018) = Exhibit 3: January 2018 + July 2018 = 300,000 + 325,000 = $625,000
Inventory(2019) = Exhibit 3: January 2019 + July 2019 = 700,000 + 750,000 = $1,450,000
Retained Earnings (2018) = (Retained_Earnings_2017 + Net_Income_2018) = 0-5000 = $ -5000
Retained Earnings (2019) = (Retained_Earnings_2018 + Net_Income_2019) = -5000+50000 = $45000
Sales Revenues (2018) = $0 (No sale took place in 2018)
Sales Revenues (2019) = (Number_of_Units_Sold x Average_Price) = 250 x 10000 = $ 2,500,000

COGS (2018) = $0

COGS (2019) = 250 barrels sold (Using FIFO: 100 sold in 2018, 100 sold in January 2019 and 50 in July
2019) = 300,000 + 325,000 + 700,000 + 375,000 = $1,700,000

Operating Expenses (2018) = $0

Operating Expenses (2019) = Sum of disused shipyard lease per month, second-hand equipment lease,
advertisement, and other expenses = (7,500 * 12) + 50,000 + 75,000 + 230,000 = $445,000

SG&A (2018) = $0

SG&A (2019) = Sum of Sales Commission, Operating expenses, and Salary expenses to Adger, the master
distiller = 250,000 + 445,000 + 50,000 = $745,000

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