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ACC 308 Management Analysis Brief
ACC308
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The management analysis of the Peyton Approved Company has been
conducted here that will explain the company’s financial activity overview for the
forecast period of 2017. This detailed analysis will include operational efficiency,
financial stability, liquidity, investors, creditors, financial management information on
the condition of finance, and comparative changes that occurred in between these
years. Moreover, it will also provide information on whether the company will be
able to achieve the selected target or goals to expand its business performance growth.
The current ratio of the Peyton Approved Company is 5.78%. It shows that
the current liability of the company can be paid 5.78 times over its current assets. If
the company's current ratio is less than 1.0%, then the scenario will be different. In
such a case, I would have said that the short-term liability could not be paid by the
company as its current liquidity is not allowing them to do it (Krishnankutty &
Chakraborty, 2011). But, in the present case, the scenario is different, and the
company is capable of managing everything. As compared to 2016, .60% of the
current ratio has been increased in the company. As the company is looking for
expanding its operations, it seems to be a good sign for the creditors. The company
has greater opportunities from the investors to get investment due to the positive
trend.
Alternatively, the acid test ratio or quick ratio gives focuses on the company's
liquidity and its ability to pay the company's obligations within the period of 90
days, not more than that (Bragg, 2022). In the present scenario, the quick ratio of the
company is 4.89%. It indicates the growth of the company and its ability to convert
its account receivables into quick cash within 90 days, not more than that. It has
found a .29% increase as compared to 2016. A company's ability to convert its
average accounts receivables into quick cash can be identified with the A/R turnover
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within one year. Currently, the A/R turnover ratio of the Peyton company is 5.91%.
It shows a .38% increase as compared to 2016. Moreover, it indicates that the
company’s account receivable is 5.91 times in a year, which is considered to be an
excellent sign for creditors.
The inventory turnover is considered the fourth ratio that is evaluated with the
information relating to managing the company's inventory. The current ratio of the
Peyton Approved Company is 7.72%. It has been found that the current ratio has
dropped by 1.09% as compared to 2016. It indicates that the company's sales are
low, they are facing overstocking, not doing marketing their product in an effective
way and inefficiencies in their product line (What is inventory turnover: Inventory
turnover formula in 3 steps, 2021).
Further, the gross margin ratio is considered the fifth ratio that has been
evaluated. It helps to manage the company's labour during its production process as
well as give data relating to the company's ability to use its raw materials efficiently.
The current gross margin of the Peyton Approved Company is 68%. It shows that
.68 % of the company is remaining to cover the daily operational expenses from
selling their products. The operational expenses include utilities, wages, funds or rent
that can be used in further future projects.
The return on sales ratio is considered to be the sixth ratio that has been
evaluated for the Peyton Approved Company. This ratio represents the bottom line of
the company, where it gives focuses on its operational efficiency and well managing
of its resources (Borad, 2022). If the company is achieving a profit margin, then the
return on sales ratio data can help the investors, creditors, and the company to assess
it. The Peyton Approved Company is currently generating a profit of 53% by using
47% of its revenue. As a result, the profits can be utilised to pay dividends to their
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shareholders or expand the business growth. The company's ratio has increased by 1%
as compared to 2017. However, it has been found that company should decrease their
extra expenses to grow their return on sales ratio.
The return on equity is considered to be the seventh ratio that has been
evaluated for the company. It is known as the most crucial ratio for business owners
and investors. Moreover, the return on equity gives assessment to the business owners
and investors to know whether their investment is successful in the company or not.
It has been found that if the return on equity is more than 20%, then it is considered
to be good for the investors. If it exceeds 89%, then it will be considered
satisfactory for the investors (CBS Interactive, 2007).
The Peyton company’s shareholders have earned $1.25 for their investment on
every dollar. It has been found that the company's return on equity has decreased by
36% as compared to 2016. This shows that the company has increased the price of
their product, reduced its overhead cost, and distributed idle cash to its potential
shareholders in order to enhance the ratio of return on equity (CBS Interactive, 2007).
The return on asset ratio is considered to be the final ratio that has been
evaluated for the company. In order to generate a net income or profit income, the
return on assets helps the company to manage its assets. In the present scenario, the
return on the ratio of the Peyton company is 1.01. It shows that .08% less as
compared to the previous year. However, the declination has been seen in the
company, but it has been found that the company is performing well by generating
$1.01 for assets on every dollar.
It has been found that it would be beneficial for investors to invest their idle
cash into a corporate bond or money market account, a saving account, a certificate
of deposit in terms of the different interest rates and compounding period on the
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future value of funds. Further, it allows the company to generate interest on top of
interest. For instance, if the company were projected to invest $30,000 in the account
of the money market by paying 2.25% and it is expected to deposit monthly $1,000
in the account for 5 years, so the company would account for a total of $97,075.19.
It has been found that the recession will not be experienced by the company's
economy. In case the company's economy is facing inflation, then inclination can be
seen in the interest rates. Also, a higher amount of return will be expected for the
company. However, the assets of the company are expected to grow much quicker
because it has a plan to expand its investment and operation. As a result, it is
projected to expand the business operations in the forecast period.
The pro forma financial statements have been compiled consequently in the
company, which are based on the projections and assumptions (Averkamp, 2021). It
has been found that the information required by GAAP has been excluded from the
data provided by the report of pro forma financial. It shows that there are four
important characteristics that should have in the financial statements to improve the
decision-making process, relevancy, usefulness, and outcome in the represented
information. These important characteristics include verifiability, understandability,
comparability, and timeliness. Many investors have found that pro forma financials
lack these four characteristics, so it is not reliable consequently. As per the survey
results of the CPA Journal, nearly 63% of the participant have agreed that pro forma
financials are considered to be very less useful (James & Michello, 2003). Here, I
would not suggest the company adopt this course of action as it does not include
ethical reporting and does not align with the relevant regulation that is regulated by
SEC, FASB, and GAAP. It shows that the company need to set forth guidelines and
practices to maintain fairness, protect investor, remove any uncertainty about the
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company’s cash flow in future, facilitate capital formation, and establish efficient
markets. However, investors and creditors will not be able to measure the growth of
the company as it would hinder the company’s financial plans. Therefore, it is very
important for the Peyton company to follow the conceptual framework that has been
recognised by the FASB because it provides the balance sheet, most useful
documents, statement of cash flow, income statement, provided ratio analysis data and
shareholders equity. Thus, I give more priority to offering an accurate depiction of
the company’s financial status along with providing the initial financial statements.
While studying the financial management of the Peyton company, it is
essential to consider some things like revenue recognition, contingent liabilities, and
inventory costing. Firstly, the revenues will be reflected on the income statement in
the year they occur, which is required in the revenue recognition principle (James &
Michello, 2003). This principle is considered to be more important as it is able to
provide a clear picture of the generated revenue and the cash flow to the investors.
However, there is the possibility that the income statement would create uncertainty
and look erratic for the creditors and investors without this principle.
Next, a contingent liability is important to study while studying the financial
statements of the company. It is the unexpected obligations that include the factors
like lawsuits and product recalls (James & Michello, 2003). For instance, if the
company is expecting any lawsuits in the further coming years because of the
salmonella products with a total of $100,000, then it can reflect on the basis of the
equal probable amount that can impact the profitability of the company as well as
end up with high expense for the company. Thus, it is essential to include it in the
notes of financial statements.
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At last, the inventory costing consists of different methods of inventory,
including the average cost method, FIFO, and LIFO. It has been found that the
financial statement of the company can get impacted by the company's selected
method. For instance, if the company kept $10 to produce 300 cakes in one day and
$12.50 on the next day for 60 cakes, then the selling cost of the goods on the first
day would reflect the company’s income statements. Further, the next day produced
cakes would be the ending inventory, which can be considered to be FIFO. Thus,
this method could be effective for the Peyton Company as it would ensure that they
prevent customer complaints and delivers fresh pastries consequently. Moreover, this
method will grow the net income and value of the inventory of the company, which
can attract more potential lenders, investors, and customers (Chron.com, 2020).
On the other hand, the next day, produced cakes at $12.50 would require to
be sold first in the LIFO method. As a result, the company need to account for the
value of inventory on the basis of the $10 price per unit at the end of the projected
timeframe. Moreover, it can lead to lower net income if the producing cost of the
products is higher (Chron.com, 2020). however, this could not be a better method for
the Peyton company as this company is looking for enhancing its operations. On the
contrary, the average cost method would look for the company to take the average
price and the weighted average of the cakes sold with an aim to dictate sold goods'
cost in order to identify the company's ending inventory. It has been found that the
Peyton Company's set up price for the produced cakes will vary with the implication
of this method. However, there is the possibility that the company may not recuperate
from the generated expenses. Thus, it is important that if the company's financial
statements are not generated as per the guidelines set up by SEC, FASB, and GAAP,
then it can lead to misinterpretation of the financial statements by the investors,
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management, and lenders. As a result, the company will not be able to pay back the
amount in obtaining the capital. Hence, it is essential for the Peyton company to take
the decision very carefully when selecting different inventory methods as it can
hamper the company's goal of expanding the operation.
It concludes that the Peyton company sound good financially. This analysis shows
that it would be a great pleasure for the creditors to lend money without any doubt.
In the present scenario, the Peyton company is capable of paying financial loans that
are obtained from the financial institutions of the company. Also, the investors will
be pleased by getting $1.25 for their investment in the company on every dollar.
However, it has been found that the company has huge potential to perform well and
achieve its goal in the coming years. Only the company need to bring some minor
changes in the financial statements.
References
Averkamp, H. (2021). What are Pro Forma Financial Statements?
AccountingCoach.com. Retrieved April 5, 2022, from
https://www.accountingcoach.com/blog/pro-forma-financial-statements
Bragg, S. (2022, March 15). The difference between current ratio and quick ratio.
AccountingTools. Retrieved April 5, 2022, from
https://www.accountingtools.com/articles/the-difference-between-current-ratio-and-
quick-ratio.html
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Borad, S. B. (2022, March 11). Return on sales. eFinanceManagement. Retrieved
April 5, 2022, from https://efinancemanagement.com/investment-decisions/return-on-
sale
Chron.com. (2020, October 27). The Pros & Cons of Lifo & Fifo. Small Business -
Chron.com. Retrieved April 5, 2022, from https://smallbusiness.chron.com/pros-
cons-lifo-fifo-76596.html
CBS Interactive. (2007, March 15). Analyzing return on equity. CBS News. Retrieved
April 5, 2022, from https://www.cbsnews.com/news/analyzing-return-on-equity/
James, K. L., & Michello, F. A. (2003). The dangers of pro forma reporting. The
CPA Journal, 73(2), 65.
Krishnankutty, R., & Chakraborty, K. S. (2011). Determinants of current ratios: a
study with reference to companies listed in Bombay stock exchange.
What is inventory turnover: Inventory turnover formula in 3 steps. (2021). Retrieved
April 5, 2022, from https://www.tradegecko.com/inventory-management/inventory-
turnover-formula
