Contemporary issues in accounting Answer Sample

Introduction of : Contemporary Issues In Accounting U10473

Question 1

a)

1. b) Comment on the company’s financial performance for the year to 31 March 2023

Profitability Ratios:

• Gross Profit Margin for 2022 reduced to 40% while in 2023 stood at 43% a sign of better cost control or efficiency in manufacturing goods or service delivery. This, point to an enhancement of the organization’s efficiency in the generation of profit from their prime business (Dhanda and Shrotryia, 2020).
• The Operating Profit Margin has risen from 21.25% to 26% this shows that the company is controlling its operations cost-effectively and is gaining better operating profit before interest and tax.
• Net Profit Margin has been enhanced from 12.5% to 17.5% indicating a sound bottom line which can be attributed to enhanced gross and operating profits besides better control of tax or interest expenses.
• Thus, the Return on Capital Employed (ROCE) ratio,” improved from 10.21% to 14.61%. This means that operating profit is more efficiently made from the company capital, thus demonstrating good capital utilization (Shahwan and Habib, 2020).

Liquidity Ratios:

• Liquidity ratios: The current Ratio was 2.32 in the year 2012 and reduced to 2.03 in the year 2013 which shows less liquidity condition. Although this is still greater than once again indicating the ability of the company to pay short-term operations and liabilities we can infer from the decline that the company has slightly less liquidity buffer than in the 2022 financial period.
• A Quick Ratio also reduced from 1.72 to 1.46 which also provides evidence of the decline in liquidity. This ratio has been computed excluding the inventory; this indicates that the company’s capacity to clear short-term liabilities without resorting to inventory has deteriorated (Chandra and Juliawati, 2020).

Efficiency Ratios:

• Asset Turnover Ratio had a higher value before the financial crisis as it rose from 0.45 to 0.51 thus showing that the company is using its assets to generate more sales revenue efficiently.
• Inventory Holding Period increased from 57 to 64 days meaning the firm is taking time to sell its stock possibly showing inefficiencies in inventory or changes in stock circulation.
• The Trade Receivables Collection Period has been stagnant this year at 91 days which means that credit management policies and collection processes have not changed. However, this is quite a lengthy period and may imply some missed-ups or inefficiencies in terms of receivables collection.

Investment Ratios:

• Earnings per Share (EPS) also increased from £0.10 to £0.18, demonstrating another fact that the company has become more profitable on per share basis, which shareholders will certainly like.
• Dividend per Share was constant at £0.01 showing that while the company becomes more profitable it does not distribute a larger share of its earnings to shareholders meaning that maybe retaining a greater portion for reinvestment or to reduce on debt.
• Dividend Yield came down from 0.79% to 0.34%, meaning that shareholders got less in the form of dividends, perhaps due to share prices rising more rapidly than dividend payouts.
• From 10 to 17.5 therefore, Dividend Cover was much higher and this simply means that the company has 17.5 times coverage of its dividend and this greatly highlights the fact that the company has a lot of headroom should the board so desire, for instance, to increase dividends into the future.
• This was done from £12.60 to £16.97, which demonstrated that investors are willing to pay for more earnings which could be attributed to investors’ anticipation on its better future performances.

Question 2: Letter to Jonathan on the Importance of Studying Accounting

To: Jonathan, Engineering Manager

Subject: The Importance of Accounting in Management Studies

Dear Jonathan,

I appreciate there are concerns regarding the study of the accounting course as part of the diploma in management at the local university’s business school. Often it can be confusing that accounting is a significant discipline for an engineer, and may not have much connection to working life. Nevertheless, knowledge in financial accounting and management accounting will help to get a lot of insights that should increase the decision-making quality and business management dramatically.

Why is accounting important for an engineering manager?

Be aware that in an engineering manager position, organizational tasks may go further than the role of the technical specialist while making decisions that relate to the company’s gains and losses. Accounting, therefore, is an essential method of explaining developments in resource use, costs, and the overall financial situation.

1. Financial Accounting

Financial accounting is mainly concerned with providing special financial statements that include income statements, balance sheets and cash flow statements. While this may seem distant from engineering concerns, understanding these documents helps in several important areas:

Resource Allocation: Financial reports offer potential users information on a company’s financial health (Olayinka, 2022). This means that with this knowledge, it can be possible to understand clearly how viable some proposed investments in new equipment, technology or people are financially.

Budgeting and Financial Planning: It is quite common when many managerial positions imply some budgeting tasks. A basic knowledge of financial accounting helps in monitoring the expenses, estimating the costs and evaluating the compliance of the financial strategies with the general goals of the enterprise (Wirawan Widjanarko et al., 2022).

Communication with Stakeholders: These are prepared periodically and disclosed to outside parties, investors and regulators for example. This knowledge assists in participation in discussions with finance teams or senior management when one can read and identify these documents.

2. Management Accounting

Management accounting concerns the preparation and presentation of financial information for decision-making purposes in an organization (Gardi et al., 2021). This type of accounting is essential for improving efficiency and cost-effectiveness in manufacturing:

Cost Control: In a manufacturing setting, control of production, labour and materials costs is very important. There are circumstances whereby expenses are incurred in such a manner that their influence on engineering projects’ profitability is controlled by management accounting tools.

Performance Measurement: Cost accounting provides tools such as cost/value analysis as well as costs/benefits analysis for measuring operational performance. With these tools, it is possible to assess whether a department is effective in its charges and whether remedial measures would be needed.

Strategic Decision Making: Management accounting can aid the organisation in strategic planning about investment, evaluation of costs and benefits and appraisal of projects for investment. This knowledge also aids in the control function of technical decision-making in line with the overall financial strategies of the company.

Relation to the Work of an Engineering Manager

Together with engineering and accounting disciplines, financial information can facilitate better project and operational decisions and resource control. For instance, while developing capital expenditure proposals on new equipment, the knowledge of accounting assists in the justification of a capital investment based on the returns on investment and cash flows expected to be generated (Barker et al., 2021). Furthermore, management accounting helps facilitate the planning and control of project activities to make those operations effective, efficient and financially responsible.

Question 3: Sales and Trade Receivables Budget

Sales Volume Trend:

There is a variation in the number of go-karts sold in the particular six months’ time frame. January starts with 100 units sold while it reduces to 80 units in the next month of February might be due to certain change in the demand pattern depending on the seasons of the year or any other factors in the market. But sales gradually rise from March to 180 units in June. This flares up is.an incentive to a rise in the demand for the product in question since it shows gradual increase in traffic and thus potential customers.

Impact of Price Increase:

For the selling price per go-kart, an increase from £50 in May has been proposed to £60. Even despite the rise in price for its products, the sales’ volume remains to be high, which shows that any increase in the price does not affect the market’s demand. Indeed the revenue spike during May and June signifies that the consumer is willing to buy the product at the new higher price, and therefore the consumer may have a certain level of brand affiliation or the perceived value of the product is high. The increase in the price leads to increased sales revenues with May the and June being leading months in terms of revenues (Alrawabdeh, 2021).

Revenue Growth:

Total sales revenue for the six month is £40,800. The business has shown a healthy growth in its revenues and especially in the period after April. May and June are averaging better when it comes to earnings as the company earns £9,000 in May and £10,800 in June from both volume and selling price. It has been attributed to good market conditions and proper pricing of the products during those months.

Receivables Collection Lag

It is important to note that credit sales carried out in the first two months of the year create credit volume which does not become receivables until later on, in this case until the third month where the company receives £5,000 of credits which was used for sales in January.

Cash Flow Considerations

Sales-revenue growth shall also be important to notice, and yet it is essential to consider receivables collection and management of cash flows. This is so because as the sales volume and revenue increases more cash will be with hold in trade receivables. For instance, the company has £15,000 of accounts receivables at June end, which is a sizeable part of the total revenues. Failing to collect this amount on time may lead to a problem of liquidity in the organization (Zimon et al., 2021).

Potential Risk of Bad Debts

Extended credit always comes with the risk that customers might pay late or may never pay at all. Since £15,000 of the sales are still outstanding at the end of June, it will be necessary to pay more attention to the receivables to ensure that the amounts are collected on time. Delays in collection could present a problem to the company in a way that it may be unable to fund its operations or to reinvest for further growth (Doniger and Kay, 2021).

‘

References

• Alrawabdeh, W. (2021). Seasonal Balancing of Revenue and Demand in Hotel industry: the Case of Dubai City. Journal of Revenue and Pricing Management, [online] 21(1). doi:https://doi.org/10.1057/s41272-021-00290-6.
• Barker, R., Lennard, A., Penman, S. and Teixeira, A. (2021). Accounting for intangible assets: suggested solutions. Accounting and Business Research, [online] 52(6), pp.1–30. doi:https://doi.org/10.1080/00014788.2021.1938963.
• Chandra, S. and Juliawati, C. (2020). Effects of Long Term Debt to Total Assets, Short Term Debt to Total Assets, Total Asset Turnover, and Inventory Turnover on Profitability of Manufacturing Companies in Consumer Goods Subsector Listed on IDX. Journal of Applied Business and Technology, 1(3), pp.212–222. doi:https://doi.org/10.35145/jabt.v1i3.47.
• Dhanda, U. and Shrotryia, V.K. (2020). Corporate sustainability: the new organizational reality. Qualitative Research in Organizations and Management: An International Journal, ahead-of-print(ahead-of-print). doi:https://doi.org/10.1108/qrom-01-2020-1886.
• Doniger, C.L. and Kay, B. (2021). Ten Days Late and Billions of Dollars Short: The Employment Effects of Delays in Paycheck Protection Program Financing. Finance and Economics Discussion Series, 2021(003), pp.1–71. doi:https://doi.org/10.17016/feds.2021.003.
• Gardi, B., Abdalla Hamza, P., Sabir, B.Y., Mahmood Aziz, H., Sorguli, S., Abdullah, N.N. and Al-Kake, F. (2021). Investigating the Effects of Financial Accounting Reports on Managerial Decision Making in Small and Medium-sized Enterprises. [online] papers.ssrn.com. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3838226.
• Olayinka, A.A. (2022). Financial Statement Analysis as a Tool for Investment Decisions and Assessment of Companies’ Performance. International Journal of Financial, Accounting, and Management, [online] 4(1), pp.49–66. doi:https://doi.org/10.35912/ijfam.v4i1.852.
• Shahwan, T.M. and Habib, A.M. (2020). Does the efficiency of corporate governance and intellectual capital affect a firm’s financial distress? Evidence from Egypt. Journal of Intellectual Capital, ahead-of-print(ahead-of-print). doi:https://doi.org/10.1108/jic-06-2019-0143.
• Wirawan Widjanarko, Rachmat Pramukty, Hadita Hadita and Yulianah Yulianah (2022). STRATEGIC FINANCIAL MANAGEMENT IN MICRO, SMALL AND MEDIUM ENTERPRISES (MSMES). Jurnal Ekonomi, [online] 11(01), pp.255–260. Available at: https://www.ejournal.seaninstitute.or.id/index.php/Ekonomi/article/view/230 [Accessed 23 Sep. 2024].
• Zimon, G., Nakonieczny, J., Chudy-Laskowska, K., Wójcik-Jurkiewicz, M. and Kochański, K. (2021). An Analysis of the Financial Liquidity Management Strategy in Construction Companies Operating in the Podkarpackie Province. Risks, [online] 10(1), p.5. doi:https://doi.org/10.3390/risks10010005.

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