商务会计outcome3-5 notes 2010.6.25.doc

IntroductionSSP plc is engaged in food processing, supplying all the main supermarket chains with first class processed meat products. This report has been prepared at the request of the chief executive of SSP plc. It will analyse the information contained in the financial accounting statements of the company. It will consider the users of this accounting information, the sources of finance an analysis of the companys financial performance and position. In undertaking this report the companys financial statements have been examation in detail and key accounting ratios calculated . This report will introduce the users of financial informations purpose and what financial statement will answer their questions. In the end, there are some recommendations.Users of financial information:Management The Purpose of Financial Information: decide purchasing and pricing policies, etc. Assessment of performance and assistance in planning and control function. The Source of Financial Information: All corporate information, both public and private.EmployeesThe Purpose of Financial Information: Employees are generally interested in job security and future salary negotiations. They will therefore be particularly interested in profitability and the companys future prospects. The Source of Financial Information: Profit and Loss- profit/tax figures. Directors report-future plans, employment details.Present Shareholders The Purpose of Financial Information: Assess the profitability of the company. Assess performance of the board. Whether to remain a shareholder in this business, increase or decrease investment, or to sell their shares and invest elsewhere. The Source of Financial Information: Profit & Loss profit and dividend figures; Profitability ratios; Directors report future plans.Potential Shareholders The Purpose of Financial Information: Income/growth potential from investment. Compare the profitability and future prospects of the company with others to ascertain the best investment option. Assess the risk attached to investment. The Source of Financial Information: Profit & Loss profits retained/distributed; Balance sheet capital structure; Ratio analysis.Short-term Creditors The Purpose of Financial Information: Evaluate the level of risk and the prospects of the money being repaid. The Source of Financial Information: Balance sheet net current asset figures; Cash Flow statement major inflows/outflows of cash; Liquidity ratio.Analysts The Purpose of Financial Information: Assessment of the company with a view to recommending investment or disinvestment, etc. The Source of Financial Information: All published information.Sources of Finance.A review of the balance sheet of SSP plc, has revealed the following sources of finance: Short term sources and loan capital: Trade Creditors- This is normally considered a good source of finance as it is normally free and in the case of SSP plc the amount outstanding is 544,000 less than matched by monies due from debtors 306,000. This source should be used sensibly, otherwise supplies and good name might not be put at risk. The figure in 2004 is less than in 2003. The creditors is 405,000 in 2004.therefore, it appears to be using this source of finance less extensively this year.Tax - the corporation tax figure is not required to be paid until some nine months into the new financial year.Bank overdraft- Company has a bank overdraft of 86,000. A bank overdraft is an agreed sum by which a customer can overdraw their current account. It is normally secured on current assets, repayable on demand and used for short term working capital fluctuations. The interest cost is normally variable and linked to the bank base rate.Long term source and loan capital: Debentures- A debenture is a form of borrowing by a firm. It may issue debentures of a fixed value at a certain rate of interest. These debentures may be bought by individuals or by financial institutions. The debentures will have a fixed time period, after which they will be paid back. This may be 5 or 10 years or in some cases even longer. SSP plc has 1,560,000 of debentures in 2003.And in 2004,it also has 1,560,000 of debentures.Long term source and equity capital:Share CapitalThere are two types of shares: ordinary and preference shares. Preference shareholders have a preferential right to a fixed dividend before any ordinary share dividend is paid. Thereafter the amount of ordinary share dividend paid will vary according to the level of profits. In the case of SSP plc has 1,950,000 of shares in 2003,and in 2004 it has been remained. So it is also 1,950,000 of shares in 2004.Profit and Loss Account- Profit and Loss Account is the most important source of equity for a company. It is the ideal source of finance as it carries no service cost. Whether or not the shareholders will agree to profit being retained rather than distributed will depend on whether they feel the directors will make good use of it, and of course on how much they need the income. In the case of SSP plc 935,000 has been retained in 2003.In 2004,it is 1,355,000. This is a good sign, it shows the companys Net Current Assets and Net Worth is increase, they have more money to invest in other items.Ratio AnalysisProfitability RatiosGross Profit PercentageThis ratio is an indication of the level of profit the business has made from buying and selling its stock.To calculate this ratio, we use the following formula:Gross Profit x100SalesThe gross profit percentage in 2003 for SSP plc is 59.96%. And in 2004 the gross profit percentage for SSP plc is 60.06%. Reasons for the increase in the profitability of this companys trading may 2004 has seen a partial rebound in the market and this combined with restructuring efforts has led to an increase in turnover by nearly 15%.Net Profit PercentageThis ratio shows how profitable a business is after all expenses have been taken into account. It compares the net profit figure with sales revenue.The formula for this ratio is:Net Profit Before Tax x100SalesThe net profit percentage in 2003 is 10.13%. And in 2004 is 6.73%. An decrease in the net profit percentage is a bad sign as it indicate the company is less profitable, perhaps because sales have decrease, cost of sales has increased or expenses have increased. In 2003 SSP plcs cost of sales is 4674 and expenses is 5584. In 2004 cost of sales is 5345 and expenses is 6902. Cost of sales and expenses have increased. This reasons has led to an decrease in net profit before tax.Liquitidy RatiosCurrent Ratio(or Working Capital Ratio)This shows the ability of the business to pay its short-term debts.To obtain the current ratio, we apply the following formula:Current Assets: Current LiabilitiesThe current ratio in 2003 for SSP plc is 1.56: 1. In 2004 the current ratio is 1.78: 1. Generally speaking a healthy current ratio is at least 2: 1. A ratio of greater than 2:1 indicates that cash is lying idle. So in this case the current ratio in 2003 and 2004 are unhealthy. The main reasons for the increase in the current ratio are the decrease in creditors and tax. During SSP plc are planning to take even greater strides forward by opening a new processing plant in Glasgow that may account for the decrease in bankthis also reduced liquidity.The Acid Test Ratio(Quick Ratio)This ratio is considered a better indication of the business ability to meet its current liabilities.The ratio for the acid test is:Liquid Assets: Current Liabilities(Liquid Assets=Current Assets-Closing Stock)The acid test ratio in 2003 for SSP plc is 0.77: 1. In 2004 the acid test ratio is 0.64:1 . Generally speaking a healthy asset test ratio is at least 1: 1. the company whereas ratio of greater than 1: 1 indicates that cash is lying idle. So in this case the acid test ratio in 2003 and 2004 are unhealthy. The main reasons for the increase in the current ratio are the decrease in creditors and tax. During SSP plc are planning to take even greater strides forward by opening a new processing plant in Glasgow that may account for the decrease in bankthis also reduced liquidity.Efficiency RatiosStock TurnoverThis shows the number of times in the period the business has replaced its stock. This ratio indicates how fast stock is turned into sales hence earns a profit for the firm.The calculation we will use for determining stock turnover is:Cost of Goods SoldClosing StockThe stock turnover in 2003 for SSP plc is 7.69 times. In 2004 the stock turnover is 6.71 times. Generally speaking a higher rate of stock turnover is a healthy sign as it indicates that the company is buying more stock, most probably as a result of selling more. However, a higher rate of stock turnover can sometimes be a result of poor stock control. The company may be buying more stock as a result of stock being damaged, lost, stolen or wasted. In this case the stock turnover is decrease is a unhealthy sign. This decline may be explained by the poor stock mix or overstocking. Because the closing stock in 2003 is 608 but in 2004 it increase to 796. Debtors Collection PeriodThe length of the credit period granted to customers is an important factor that determines liquidity. The length of time a debtor takes to pay should be as short as possible.The ratio calculation is:Debtors x 365SalesThe debtors collection period in 2003 for SSP plc is 9.57 days. And in 2004 the debtors collection period is 12.33 days. Between 2003 and 2004, the number of days taken by debtors to settle has increased by 3 days. This is a bad sign as the companys liquidity benefits from slow payment from customers. This increase may be explained by the longer payment period offered to encourage an increase in sales, poor credit control, poor invoicing system, poor reminder system, lack of incentives offered to customers or increase in bad debts.Capital Structure.Gearing RatioThis ratio considers the proportion of ordinary capital compared with other capital.To determine the gearing for a company, the following formula is used:Fixed Return Capital x 100Ordinary Share CapitalFixed Return Capital=ie loans + debentures + preference share capital The gearing ratio in 2003 for SSP plc is 80%. An in 2004 the gearing ratio is 80%. When analyzing this ratio, a lower figure is more favourable indicating that the company has greater control over how net profit is appropriated. So in this case the gearing ratio in 2003 and 2004 are healthy. The main reason for no change in the gearing ratio is the debentures and the ordinary share capitals are no change.Interest CoverThis ratio shows how capable the company is of covering its interest charges.To calculate interest cover: Operating Profit - Interest PayableThe ratio has decreased from 6.04times 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 increase in debentures issued and an apparent increase in the interest rate.Cash Flow StatementOn the whole, the cash has decreased by 367,000. This is a worsening of the cash flow position. At 1/1/2004 the cash has 281,000 but at 31/1/2004 there is no cash moreover overdraft 86,000 from bank. The company made a profit of 1,135,000 that after adjustments translated to a cash inflow from trading of 1,345,000. This is a very healthy cash inflow.There are no increase debenture and share capital, both 1,560,000 and 1,950,00. Interest payments could be reduced in future by issuing ordinary shares instead of debentures. Alternatively, the company could seek to get a lower interest rate. There was also an outflow 234,000 for tax. This is an unavoidable outflow as it is based on profit. The next outflow is the largest outflow on the cash flow statement is 984,000 paid for purchase of fixed assets. This was a significant outflow and is the main factor contributing to the overall decrease in cash. The fixed assets was not fully utilized as demonstrated by the fixed asset turnover. Ordinary share dividend paid was 260,000. This is equivalent to 19% of cash flow from operating activities and is therefore an unreasonable amount. It is too high in ordinary share dividend, and then, it will affect the cash flow. Overall, cash flow is not good and healthy. Balance at 1/1/2004 is 281,000 but balance at 31/1/2004 is overdraft 86,000.ConclusionAim at 2003, the SSP plc sells increase 14% in 2004,but the net profit decrease. that because adminstation expense increased too much. Cause of SSP plc planed dilation,so they may strengthen the used of Long-term fiance. The liquid capital has been get worse for the reduction of cash, but the capital structure has stayed at the previous level so that its risk is low. The capability of give out the dividend of this company has fallen down, but the profit of this company has get better than that in the previous year. However, on the whole, the company has bad cash controlling in this year.The companys capital structure seems stable although the increased reliance on short term debt cannot continue in the longer term. The planned expansion will result in a need foe both increased working capital and new fixed assets. New long term sources of finance must be sought to finance this.Recommendation:1. Business commonly purchase raw materials or stock for resale and pay for them later. So if the firm can make a trade credit, it will delaying payment for stock, cash is made available for other uses. 2. There is a long period of accounts receivable, so the firm should re-examine the credit policy. Sequentially to improve the management of liquidity. 3. Where a firm does not wish to purchase an asset outright, they may rent it instead from a leasing company. This is a medium-term finance to solve the cash flow and finance problem. 4. Banks and other financial institutions offer loans to business for the purchase of land or buildings. The firm can use this methods to impr