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Business accounting - Essay Example

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Business accounting

Financial ratio analysis enables decision makers to uncover trends in business performance and compare different business organizations (Keown, et. al 2005). It should be noted that these ratios are classified according to the aspects that they measure including profitability, liquidity, efficiency, solvency, and investor ratios. Considering that the business organization under consideration is considered small and medium business organization, this report will focus only on profitability, liquidity, and efficiency.
In terms of liquidity, the current ratio and the acid-test ratio will be utilized. At first look, the Northern Branch displays a slightly higher level of liquidity with its current ratio of 1.060. Should all of its current liabilities become due immediately, The Southern Branch will only be able to pay off 99.6% with its current assets. However, the acid test ratio shows that most of the Northern Branch's most current assets are tied up in inventories. In fact, when inventory is deducted from the current assets, it will only yield an acid-test ratio of 0.34. On the other hand, the Southern Branch has much more liquid assets indicated by its acid test ratio of 0.54.
In terms of efficiency, the following ratios will be considered: debtor's turnover; debtor days; creditor's turnover; creditor days; and stock turnovers which will be divided according to the main inventories namely, food and beverages. The Northern Branch has a lower debtor's turnover leading to higher debtor days which indicates the collection period of account receivables. During the fiscal year, the branch reports debtor's turnover of 9.30 and debtor days of 39.21. On the other hand, the Southern Branch appears to be more efficient in collecting its receivables with its debtor's turnover of 12.13 and debtor days of 30.08 days.
It is also apparent that the Southern Branch is relatively better in servicing its short term creditors as indicated by its higher creditor turnover and lower creditor days. The branch's creditor's turnover reported is 6.09, far better than Northern Branch's 1.74. This is translated to creditor days of 59.85 (Southern Branch) which is very much faster than Northern Branch's payment period of 208.63 days.
In terms of inventory management, the Northern Branch still lags behind the Southern Branch both in food and beverages. The Southern Branch's stock of food turns at an average of 17.24 annually and stays in the company's warehouse in a period of 21.17 days. On the other hand, the Northern Branch's turnover averages 5.66 times a year while stock days is 64.39. The same is true with beverages. While the Southern Branch has a turnover of 3.05 and stock days of 119.54, the Northern Branch is not able to sell its beverage stocks for the fiscal year. It stays in the company's warehouse for more than a year (593.39 days) before it is finally sold.
To measure profitability, this report will look at the return of capital employed (ROCE), gross profits, and net profit. The Southern Branch reports higher ratios in all these categories. The branch has an ROCE 0.36 compared to the Northern Branch's 0.26. In terms of profit margins, the Southern Bra ...Show more

Summary

The performance of a business organization is quantitatively reflected in its financial statements. Ascertaining the financial health of a company has become important to different decision makers like managers, stockholders, potential investors and creditors…
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Business accounting essay example
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