UECB 2201

ACCOUNTING AND
FINANCIAL MANAGEMENT

PREPARED BY:
Nurul Atiqa binti Suryanto UDC200188

Intan Nurfarahanum Binti Azman UDC200170

Laavanya A/P Balamurale UDC190224

Ridzwan Alif bin Amir Zamrous UDC 200113

Jesseca A/P Rajaya UDC200153

Siti Nur Aisyah Binti Ahmad Hafizan UDC200197

Vaisnuvi Raj UDC200133

Yogamani Parasuraman UDC180187

PREPARED FOR :

SIR MUSTAFFA BUKHARI

1.0 Introduction

A financial statement is a report that shows the financial activities and performance of a
business. It is used by lenders and investors to check a business’s financial health and
earnings potential. Financial statements can cover any period of time, although they’re most
commonly prepared at the end of a month, a quarter, or a year.

An accounting ratio compares two line items in a company’s financial statements, namely
made up of its income statement, balance sheet, and cash flow statement. These ratios can
be used to evaluate a company’s fundamentals and provide information about the
performance of the company over the last quarter or fiscal year.

Profitability is a measure of an organisation's profit relative to its expenses. Organisations

that are more efficient will realise more profit as a percentage of its expenses than a less-
efficient organisation, which must spend more to generate the same profit.
2.0 Discussion

Current Ratio
2021 2022

= Current Asset / Current liabilities = Current Asset / Current Liabilities

= 157,000 / 44,000 = 220,500 / 50,500
= 3.57 times = 4.38 times
Average Collection Period
2021 2022

= Account Receivable / (Annual credit = Account Receivable / (Annual credit

sales/360 days) sales/360 days)
= 53,500 / (550,000/360) = 69,500 / (625,000/360)
= 53,500 / 1,527.77 = 69,500 / 1,736.11
= 35 days = 40 days

Inventory Turnover Ratio

2021 2022

= Cost of Good Sold / Average Closing Stock = Cost of Good Sold / Average Closing Stock
= 396,000 / 99,000 = 437,500 / 145,500
= 4 times = 3.02 times

Total Asset Turnover Ratio

2021 2022

= Sales / Total Asset = Sales / Total Asset

= 550,000 / 432,000 = 625,000 / 533,000
= 1.27 times = 1.17 times

Debt Ratio
2021 2022

= Total Debit / Total Asset = Total Debit / Total Asset

= 220,500 / 432,000 = 294,000 / 533,000
= 51.04% = 55.25%

Times Interest Earned

2021 2022

= Operating Profit / Interest Expenses = Operating Profit / Interest Expenses

= 66,000 / 26,000 = 81,500 / 36,500
= 2.54 times = 2.23 times
 Net Profit Margin
2021 2022

= Net income available to common = Net income available to common

shareholder / Sales shareholder / Sales
= 24,000 / 550,000 = 27,000 / 625,000
= 0.0436 = 0.432
= 4.36% = 4.32%

Return on Assets
2021 2022

= Net income available to common = Net income available to common

stakeholder / Total Asset stakeholder / Total Asset
= 24,000 / 432,000 = 27,000 / 533,000
= 0.0556 = 0.0506
= 5.56% = 5.06%

Return on Equity
2021 2022

= Net income available to common = Net income available to common

stokeholder / Common Equity stokeholder / Common Equity
= 24,000 / 211,500 = 27,000 / 238,500
= 0.1135 = 0.1132
= 11.35% = 11.32%

2.0 Discussion Interpretation

Current Ratio

2021: Current assets are more than enough to pay down the short term.

2022: Current assets are more than enough to pay down the short term.

Average Collection Period

2021: A shorter average collection period is 35 days means a business has higher
liquidity.

2022: A shorter average collection period is 40 days means a business has lower liquidity.
Inventory Turnover Ratio

2021: A high turnover implies good sales and possibly excess inventory also known as
overstocking.

2022: A low turnover implies weak sales and possibly excess inventory also known as
overstocking.

Total Asset Turnover Ratio

2021: A high ratio indicates the company is using its assets as efficiently.

2022: A lower ratio indicates the company is not using its assets as efficiently.

Debt Ratio

2021: Ratio is more than 50% higher implies the company has more financial risk.

2022: Ratio is more than 50% higher implies the company has more financial risk.

Time Interest Earned

2021: Firm has earnings before interest and tax that currently covers up to 2.54 times its
existing interest expense

2022: Firm has earnings before interest and tax that currently covers up to 2.23 times its
existing interest expense.

Net Profit Margin

2021: For every RM1 of revenue earned, the net profit margin RM 0.0436
2022: For every RM1 of revenue earned, the net profit loss RM0.0432

Return on Assets

2021: For every RM1 of assets that is made available, the management is able to
generate a return after tax of RM0.0555

2022: For every RM1 of assets that is made available, the management is able to
generate a return after tax of RM0.0506

Return on Equity

2021:The net income is 0.1134 and its measure of low profitability

2022: The net income is 0.1132 and its measure of low profitability.

Explanation for the purpose of each ratio

Now we have a summary of all 9 financial ratios of the company. The first thing that
I want to explain is that the current ratio of 2021 and 2022 is better compared to
the industry average. We can look at the current and quick ratios for 2021 and
2022 and see that the liquidity is slightly increasing between 2021 and 2022.

By looking at the quick ratio for both years, we can see that this company has to
sell inventory in order to pay off short-term debt. The company does have short-
term debt: accounts payable and notes payable, and we don't know when the
notes payable will come due.

Let's move on to the asset management ratios. We can see that the firm's credit
and collections policies might be a little restrictive by looking at the high receivable
turnover and low average collection period. There is a decrease in the inventory
turnover ratio, but the fixed asset turnover ratio is remarkable.
The fixed asset turnover ratio measures the company's ability to generate sales
from its fixed assets. This ratio is very low for both 2021 and 2022 compared to the
industry average. It is not being used efficiently to generate sales for the company.
In addition, the company has to pay interest on loans to buy it through long-term
debt.

The return on assets company is lower than industry average which is lower than 10%
is dragging down total asset turnover. If you follow this analysis through, you will see
that it is also substantially lowering this firm's return on assets profitability ratio.

This fact means that the return on equity profitability ratio will be lower than if the
firm was financed more with debt than with equity. On the other hand, the risk of
bankruptcy will also be lower.

Unfortunately, you can see from the times interest earned ratio that the company
does not have enough liquidity to be comfortable servicing its debt. The company's
costs are high and liquidity is low. Fortunately, the company's net profit margin is
decreasing because their sales are decreasing.

Return on Assets is impacted negatively due to the low fixed asset turnover ratio
and, to some extent, by the receivables ratios. Return on Equity is decreasing from
2021 to 2022 compared to industry average.
3.0 Conclusion

All of the above-discussed financial statements eventually help build the ratios of the
organization for final analysis. Hence, different ratios across the various categories will assist
in analyzing the overall health of the company. Analysis of financial statements is extremely
necessary for every business to develop and increase its sales. It indicates massive records
which are related to the efficiency of a company and its managerial overall performance to
identify the strengths and weaknesses of the company.

For making forecasts approximately the prospects of the company to make decisions, indeed
it is important to understand that it has its limitations as well. Besides, it will help to
understand the significance of components of the financial position of the company.
Throughout the organization's financial statement analysis, businesses could make
decisions related to the operations of the company. Therefore, it helps to find out about the
profitability and operational performance of the company for assessing its financial health.

Reference

Xero and beautiful business are trademarks of xero limited: 2023,

https://www.xero.com/my/glossary/financial-statement/#:~:text=A%20financial%20statement
%20is%20a,financial%20health%20and%20earnings%20potential.

GENE HALL,CEO,GARTER,2023

https://www.gartner.com/en/finance/glossary/profitability#:~:text=Profitability%20is%20a
%20measure%20of,to%20generate%20the%20same%20profit.

Written By, Edu Pristine, May 26 2015

https://www.edupristine.com/blog/analysis-of-financial-statement.