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ACC 308 Final Project: Management Analysis Memo
Southern New Hampshire University
April 20,2022
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Being a freshly appointed accounting professional for Peyton approved company, my
first professional assignment is to take up evaluation of the company’s ratio analysis and come to
a conclusion whether there is a scope of expansion in near future or the assessment of the
company’s ability to meet their business goals and utilization of the company ratios will
contribute in the determination of the outcome of this analysis. Ratios like the gross margin will
come in handy to know if the organization is using its resources such as the labor and supplies
properly or not (Amanda, 2019). The company’s sales, inventory and liquidity can be checked
with the use of inventory turnover as a parameter. The current working capital will give a brief
overview of the company’s liquidity and solvency. All these factors and parameters defined in
ratios will help me conclude and report if Peyton Approved should go for expansion by next year
or not.
The first ratio used to assess the current scenario of the company is the current ratio. The
ratio gives us an idea of how the liquidity and solvency of Peyton Approved increased from 5.18
in 2016 to 5.78 in 2017. The increase observed is an indicator of the company’s improved
financial and business situation. Current ratio is not too high nor too low which shows the
company’s situation over a short period of time. On the other hand, it also informs about the
company’s short-term assets and its ability to payoff short term liabilities. (Lee & Kwon, 2020).
The company’s quick ratio improved from 4.60 in 2016 to 4.89 in 2017. This meant that
the company was doing financially well for a short period of time. The next ratio to analyze is
the turnover ratios starting with the accounts receivable turnover. The ratio lets me create an idea
of how well the company manages the credit lines it has extended to its clients in the past. The
turnover ratio for Peyton Approved was 5.04 in 2016 and decreased to 4.79 in 2017. The
decrease indicates some lacunae in the current credit policies and is a sign that the company
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needs to reevaluate its credit giving strategies and who the credit lines are extended to. The next
ratio to evaluate from the turnover ratios is the inventory turnover ratios that indicate how the
company is performing on financial grounds as it is a purchase seller model of business.
The company’s inventory turnover ratio decreased from 9.08 in 2016 to 5.41 in 2017
which is a sign of inventory mismanagement within the company.
Another measurement used for expansion potential estimation is the gross margin ratio.
The gross margin indicates how efficiently Peyton Approved utilized its labor and other
resources. The company grew in gross margin ratio from 66 percent to 68 percent between 2016
and 2017. Therefore, the company was utilizing its resources properly in that time. However, the
return on equity dipped from 160 percent in 2016 to 125 percent in 2017 which shows that the
company was under performing in that area during that time. However, there is also an increase
in return on sale from 52 % in 2016 to 53% in 2017,while return on assets observed with a
decrease from 108 percent 2016 to 101 percent in 2017.
Based on the financial statements of Peyton Approved and the ratios projected, the
company can expand soon as it performs well in multiple areas. However, the conclusion that it
is underperforming in certain aspects cannot be ruled out either. These aspects need to be
improved gradually if the company aims to expand in near future. Based on the turnover ratio,
the company needs to improve credit management and define a structured payment retrieval
system under future improvements. Although Peyton Approved needs improvement in certain
areas it is maintaining its profitability based on its return on assets and resource management
strategies. However, it does need to improve its return on equity and inventory turnover ratios.
Financial Footnotes :
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Depreciation for the company after utilizing $15,000 for purchasing new equipment using
long term note with no residual value and an estimated seven-year life will be worth $2,142.86
for the year as calculated by the straight-line depreciation method.
The inventory is expected to reach a value of $687.82 in 2018 with 80 percent of the
existing store value which was $859.77 in 2017.
In 2017, the expense for supplies was $3,000.46 however, in 2018, the figure will be
$2,400.37 which is again 80 percent of the current expense. Long term note is taken out of long-
term debt expense which was used for the purchase of new equipment at a price of $15,000. In
addition to this, there was a $5,000 long term note used for financing the company’s expenses.
Pro forma financial statements are made with the use of financial statements and events arising
from past of the company. These statements are then used to predict the hypothetical future of
the company (Öztürk & Karabulut, 2018). The Peyton Approved company is also depending on
its past financial statements to generate an idea on whether expansion will be favorable at this
time or too risky for the company’s assets.
The company’s past income statement can be used along with its balance sheet, statement
of cash flows to create proforma financial statement to condense the company’s current stance on
expansion and its profitability. However, based on the conclusions, the stance would be
hypothetical and can change with the factors that affect its expansion prospects. Since the
company is using LIFO accounting practices which means the most recently purchased items are
sold in the market first and count in the COGS first. It will be used to find the effect of inventory
costing accounted for by the company. The application of LIFO principles means the reported
costs will be lower than the actual costs as the inventory is older.
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When the contingent liabilities of the company are taken into consideration, it reflects the
outcome of an uncertain future and is recorded as likely to happen. This is done only when the
liability is estimated properly and accounted for. This also reflects what will occur if the
company Peyton Approved cannot meet its short- or long-term liabilities. (Lee & Kwon, 2020).
The Revenue Recognition process “stipulates how and when revenue is to be recognized” which
is used to apply accrual accounting so that the revenue is “recognized when realized and earned
not when cash is received” (Amanda, 2019)
When the reader uses pro forma financial statements, he must remember that these
financial statements are a summary of the company’s previous years’ financial statements. These
statements are analyzed and combined to create a hypothetical future outcome. Therefore, the
pro forma financial statement is not a fact backing the company’s future financial standing. The
projection is hypothetical, and it can change with time and events because it is not backed by real
facts.
Peyton Approved has shown a promising increase in its assets, liabilities, and equity. The
company can gain more from its retained earnings instead of its liabilities. In conclusion, the
company is utilizing its previous years’ profits to improve its current financial standing instead
of depending on loans to achieve its growth objectives. The company is in good financial and
business standing currently which can be used to take a positive decision on expansion.
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References
Amanda, R. I. (2019). The impact of cash turnover, receivable turnover, inventory turnover,
current ratio and debt to equity ratio on profitability.IJournal of research in
management,I2(2).
Lee, N., & Kwon, K. H. (2020). Revenue recognition on percentage of completion basis and firm
value.IInternational Journal of Business and Society,I21(1), 25-41.
Öztürk, H., & Karabulut, T. A. (2018). The relationship between earnings-to-price, current ratio,
profit margin and return: an empirical analysis on Istanbul stock exchange.IAccounting and
Finance Research,I7(1), 109-115.
