Running Head: ACC 308 1
ACC 308 Management Analysis Brief
ACC308
SNHU
April 3,2022
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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 within one year. Currently, the A/R
turnover ratio of the Peyton company is 5.91%. It shows a .38% increase as compared to
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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 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.
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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 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
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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 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.
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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.
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
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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, 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.
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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
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.FThe CPA
Journal,F73(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
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