HND-会计考试outcome3.doc

1. IntroductionThis report is written about a management and a planning tool. Those can help the manager to make some decision by some financial information. And the report will divide three parts according to the SSPs statements (year ended 31 December 2004) in the case. The first part is “Users of financial information that identify four people/organizations who use these accounts and why they require this information and which financial information will supply their needs. The second part is “Sources of finance” that the sources of finance employed by the company and describe the character of each source. The last part is “Ratios analysis about SSPs business”, which shows cash flow of SSP over the accounting period and gives an overall analysis after reviewing and analysis some important ratios.2. Users of financial informationManagementManagement refers to those people who study the statements to administer and control the use of the resources. According to the SSP plcs financial statement, these must have management department in terms of paying for administrative expenses based on the financial statement.To allow management to make effective decisions, all areas of accounting information are of interest to them. Management will use the accounting information to compare performance with previous years and competitors, identify areas of improvement, plan future resource allocation, decide purchasing and pricing policies, etc.Management will use all financial sources of information, particularly ratio analysis and budgets.Potential shareholdersPotential shareholders Refers to Individuals or organizations that are considering investing in the business through buying ordinary or preference shares. According to the SSP plcs financial statement, the Dividends belong to Potential shareholders. Like present shareholders, potential shareholders will be interested in the value of and return on their investment. More specifically, potential shareholders will compare the profitability and future prospects of the company others to ascertain the best investment option.Potential shareholders will use Capital employed ratio, gearing ratio And appropriation account, Cash flow statement providing information on liquidity,Short-term CreditorsShort-term Creditors was Individuals or organizations that lend the company money or goods short-term credit. In the case, the short-term creditor was pay for trade creditors based on the financial statement.They will be analyzing the liquidity and long-term future of the business to decide the level of finance to be given. Short-term investors use the financial information to evaluate the level of risk and the prospects of money being repaid.Short-term creditors will refer to the cash flow statement, this will show if the company has sufficient funds to pay for stock bought on creditLong-term CreditorsLong-term Creditors was Individuals or organizations that lend the company money on a long-term basis. According to the SSP plcs financial statement, The Long-t based on the financial statement. The Long-term Creditor was pay for Debentures based on the financial statement.Similarly, long-term creditors will use the financial information to analyze the liquidity and long-term future of the company to evaluate the level of risk. Long-term creditors will use the financial information in order to determine if interest payment are likely to be made promptly and if the company can make the capital repayments. In addition, this group of user will be interested in the value of the assets in terms of collateral when deciding on offering finance.Long-term creditors will refer to the cash flow statement and liquidity ratios. In addition information relating to the collateral can be sourced from the balance sheet.3. Source of financeA table of source of finance in terms of financial statement of SSP plc as follows:Source of financeType of financeTerm of financeCreditorsLoan capitalShort-termBill of finance (Debtors)Loan capitalShort-termBank overdraftLoan capitalShort-termDebenturesLoan capitalLong-termOrdinary Share CapitalEquity capitalLong-termRetained profitsEquity capitalLong-termShort Term Finance is that borrows less than one year and applies to finance seasonal in trading, general working capital requirements or purchasing minor fixed asset with a short working life.Medium Term Finance is that borrows between 2-10 years and applies to finance the acquisition of materials, or fixed assets with a medium term life span, to overcome a persistent cash flow problem or finance small-scale expansion.Long Term Finance is that borrows over 10 years and applies to finance the acquisition of fixed assets with a long-term life span or finance large-scale expansion.According the SSPs Plc, there are two types of finance: Equity capital and Loan capital.Equity capital refers to capital sourced by the owner of the business which include ordinary share capital and reserves that is profit and loss account (inappropriate profit), are no interest payment, no repaid payment; more flexibility on the payment of a dividend. But, anyway the owners use the limited liability, the company will fails to pay out a dividend and the share price will fall, leaving the company at risk of a turnover bid.The share capital and reserves are long-term finance. So the ordinary share dividend paid will vary according to the level of profits. Inappropriate profit is the unused profit remaining is carried into the next trading period.Loan capital is refers to money that is borrowed from a source outside the business. This loan must be repaid in full with interest added. In the case, The SSPs trade creditors; bank overdraft and debentures are included in this category. They must be repaid in full with interest added. As the result, there is the possibility of losing the collateral or security if repayments terms are not meet. In the case, Bank overdraft was short-term loan and that is increased from 0 in 2003 to 86,000 in 2004, this action is a good way to financing. This kind of source is a fairly cheap form of finance with the added advantage of flexibility. In some cases a small overdraft facility may be offered free of charge.Trade creditor is another form of short-term finance. In the case, we can see the trade creditor is decrease by 25.6% over one year (2003 - 2004), but this is a not good sign because the Creditors Payment Period Ratio in 2004 is shorter than 2003. Using trade credit may appear to be an interest free way of raising finance, however, by delaying payment for goods customers may forfeit discounts. Delayed payments can also lead to poor relations with suppliers.Debentures are long-term loans. In the case, the debentures of the two years are the same, it is 1560,000, and we can find this is a large part of money in the cash running of this company, which made to companies that carry a fixed rate of interest. The companys fixed assets normally secure debentures. Debentures may have a fixed time period or an open time period. Debenture holders are not shareholders; therefore it referred to as external. 4. Ratios analysis about SSPs businessa. Profitability Ratios:Gross Profit Percentage: Gross Profit Turnover 100%2003: 7000 11674 100% =59.96% 2004: 8037 13382 100% =60.05% Return on Capital Employed: Net Profit before Tax Ordinary Shareholder Equity 100%2003: 1182 2885 100% =40.97% 2004: 901 3305 100% =27.26%The Gross Profit percentage has increased form 59.96% to 60.05%. This is an improvement on the previous year and show that the company has increased profitability at the trading level. Return on Capital Employed has decreased from 40.97% to 27.26%. This is not a healthy sign and is due almost entirely to a decrease in Net Profit before Tax of 1182. Existing shareholders will not be happy with the return and potential shareholders might be dissuaded from investing.b. Liquidity Ratios:Current Ratio2003: 1195 : 767 1.56 : 1 2004: 1248 : 701 1.78 : 1Acid Test: Liquid Assets: Current Liabilities2003: (1195-608 ): 767 0.77 : 1 2004: (1248-796 ): 701 0.64 : 1The Current ratio has increased from 1.56:1 to 1.78:1, but this is not healthy as the ratio is currently well bellow the ideal of 2:1. The SSP present level of trade creditors was reduced, the company now has an $ 86,000 overdraft. Stock has increased by 30.92%. The acid test ratio has decreased from 0.77:1 to 0.64:1(the perfect situation is 1:1).This is not a good sign and since stock is excluded from the calculation, is due entirely the 86,000 overdrafts. c. Efficiency Ratios:Fixed Asset Turnover: Turnover Fixed Assets 2003: 11674 4017 =2.91 times 2004: 13382 4318 =3.10 times Stock Turnover: Cost of Goods Sold Closing Stock 2003: 4674 608 =7.69 times 2004: 5345 796 =6.71 timesDebtors Collection Period: Debtors Turnover 3652003: 306 11674 365 =9.57 days 2004: 452 13382 365 =12.33 daysCreditors Payment Period: Creditors Cost of Goods sold 3652003: 544 4674 365 =42.48 days 2004: 405 5345 365 =27.66 daysThe Fixed assets turnover ratio has increased slightly from 2.91 to 3.10timesthis is a good sign. Each of fixed assets now generated $3.10 of sales as opposed to $2.91 the previous year. Fixed assets are now being used more efficiently and may be due to reduced downtime on machinery and the replacement of old plant and machinery during year 2004 ($984,000spent on fixed assets).Stock Turnover ratio has decreased from 7.69 times per year to 6.71 times. This is not a good sign. In the case, SSP should investigate stock mix as it may contain some slow moving or obsolete lines. These should be reduced in price to clear.Debtors Collection period has improved with debtors paying 2 days earlier than the previous year, which is a bad trend. Possible reasons are: 1 improved invoicing and/or credit control. 2 Discounts offered to customers for prompt payment.Creditors payment period has decreased from 42 days to 28 days, which is an improvement in a bad situation. Possible reasons for paying earlier are: Improvement in suppliers invoicing and/or credit control procedures; improved discounts from suppliers to encourage prompt payment. When the demand of meat product increased, SSP wanted to use enough stock supplied to ensure their meat fresh in quickly.d. Investment Ratios:Gearing Ratio: Fixed Return Capital Ordinary Share Capital 100%2003: 1560 1950 100% =80% 2004: 1560 1950 100% =80%Interest Cover: Profit before interest and tax Interest changes 2003: 1416 234 =6.05 times 2004: 1135 234 =4.85 timesGearing ratio has no changes as long-term liabilities and ordinary share capital keep the same during two years.Interest cover ratio has decreased from 6.05 times to 4.85times. This is not a good trend indicating that the company is less able to meet interest payments. This trend is due to the decrease in net profit as there is no change in interest charges. Overall summaryAccording to the ratios analysis for SSP plcs financial data, the profitability appear that the company should not have a good profit because the company was failure to control expenses and it increased by 23.60% against a sales increase of 14.63%. Furthermore, the liquidity ratios narrate that the companys cash wasnt have a good liquidity because these are amount of stock in the company. And in that time, the company maintain a lot of stock and bought some new fixed assets in terms in currently condition, so the efficiency ratios show that the companys cash is not effective, as the investment ratios illustrates that the companys condition of investment was not be good because the company wasnt not invest in other area. Based on above problems, these are some recommendation as follow:l Decrease shrinkagel In order to increase capital should sell the stock immediatelyl Should issue more debenture and share capitall Improve creditor span of controll by way of save money should decrease the other expense Cash flowThe C/F statement summarizes cash inflows and cash outflows and calculates the net change in the cash position for the company, throughout the period between two balance dates. In the case, SSPs cash flow was a decrease of 367,000 over the one year period. In this year, the SSP had a cash inflow of 1,345,000 that is a good trend, indicating the trade is healthy.Out flow: Interest, Tax, Payments to acquire fixed assets, Dividend.In flow: Net cash flow from operating activities.The significant outflow on the cash flow statement was 984,000 paid for purchase of fixed assets. This is an unavoidable payment but could be reduced in future by issuing ordinary shares instead of debentures. Alternatively, the company could seek to get a lower interest rate.Ordinary share dividend paid was 260,000. This is equivalent to 19% of cash flow from operating activities and is therefore a reasonable amount. Overall, the SSP should make the Credi