mfo - assignment
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Answer No. 1.
From Financial Analyst
To Fuller Smith and Turner Plc Group Board of Directors
Subject Company Performance Analysis 2009-2010
Date 20 April 2012
Introduction:
With reference to the data available, I have undertaken the financial Performance analysis of
the companys financial statements for the year 2009-10. The report starts with the trend
analysis and then concludes on the ratio analysis.(Appendix 1 - 5).
Profitability
The horizontal trend analysis shows that the revenue growth has been achieved by the
company up to 8.43%. There is an increase in gross profit of the company also which 7.17 %
is more than the previous year. It is seen that the operating profit before the exceptional
items, the reason is that the exceptional items were the reason this year which gave this spike
in the operating profit. It is see that the exceptional items were also responsible to cut down
the finance cost this year. All operating profits were high after considering the exceptional
items.
It is also observed that the company has reduced the long term borrowings but in contrast
increased the short term borrowings. The asset turnover however remains constant, the return
on assets is constant as well when exceptional items are not considered, but when theexceptional items are considered there is a increase by 2% as compared to the previous year.
Liquidity
This should be the major area of concern for Fuller Smith and Turner Plc Group as the
liquidity ratio is well below the set benchmarks thus keeping the company at high risk of
liquidity that is 0.19:1. This ratio falls below the previous years figures as there is an
increase in the days for inventory turnover by 5 days as compared to previous year.
The reason for this can be found out by trend analysis which shows that the company had
more short term borrowings as compared to previous year. Though the company has been
able to operate below the benchmarks of liquidity this year it seems that there is a high riskbecause as compared to the year 2009 the total assets have just increase by 8.66% .
Efficiency
The trend analysis shows that there is a decrease in trade receivables but increase in the
inventory, thus increasing the cost of sales by 7.17% this year. There is also an increase in the
inventory turnover period by 8 days thus reducing the efficiency.
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There have been a reduction in the debtors period and increase in the creditors period when
the figures are compared to the year 2009. This is beneficial for the company and has
increased the cash flow for the company.
Gearing
Though the company has managed to maintain the gearing ratio constant as that of the
previous year, which is around 34%, the benchmark for this is above and thus keeps the
company at average risk.
This is possible because when the long terms borrowings were reduced the short term
borrowings were increased thus balancing the change for the year 2010 and 2009.
Conclusion
Though Fuller Smith and Turner Plc Group have high revenues for the year 2010, the
company is at a high risk of liquidity. But the company can continue the operations as the
profit made is good. The company should make some provisions to decrease the short term
borrowings and thus reducing the liquidity risk.
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The following are the figures of the financial performances for the year 2009 and 2010 for
Fuller, Smith and Turner Plc.
(Ref: Fuller, Smith and Turner Plc group Statement of Comprehensive Income)
Appendix 1: Vertical Trend Analysis.
Fuller Smith and Turner Plc Group Comprehensive Statement of Position as at 27th March
2010
Fuller Smith and Turner Plc Group
Comprehensive Statement of Position 2010 2010 2009 2009
as at 27th
March 2010m % m %
Non Current Assets
Property Plant and equipment 348.20 84.35% 318.70 83.89%
Goodwill 23.90 5.79% 24.10 6.34%
Deferred tax assets 6.10 1.48% 5.00 1.32%
Other non-current assets 9.70 2.35% 9.10 2.40%
Total non-current assets 387.90 93.97% 356.90 93.95%
Current Assets
Inventories 7.60 1.84% 6.10 1.61%
Assets held for resale 0.60 0.15% 0.00 0.00%
Trade Receivables 15.60 3.78% 16.00 4.21%
Cash and cash equivalents 1.10 0.27% 0.90 0.24%
Total current assets 24.90 6.03% 23.00 6.05%
TOTAL ASSETS 412.80 100.00% 379.90 100.00%
Equity and Liabilities
Share capital 22.80 5.52% 22.80 6.00%Share Premium 4.80 1.16% 4.80 1.26%
Retained earnings 180.90 43.82% 173.30 45.62%
Other components of equity -1.30 -0.31% -3.90 -1.03%
Total equity 207.20 50.19% 197.00 51.86%
Non-Current Liabilities
Long-term borrowings 27.40 6.64% 86.30 22.72%
Derivative financial instruments 0.00 0.00% 1.50 0.39%
Pension commitments 12.70 3.08% 8.40 2.21%
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Deferred tax liabilities 37.50 9.08% 37.60 9.90%
Other non-current liabilities
Long term provisions 2.10 0.51% 2.40
Total non-current liabilities 79.7 19.31% 136.20 35.85%
Current Liabilities
Current borrowings 81.40 19.72% 8.80 2.32%
Derivative financial instruments 0.60 0.15% 0.00 0.00%
Trade payables 39.70 9.62% 33.60 8.84%
Current tax payable 3.80 0.92% 3.90 1.03%
Provisions 0.40 0.10% 0.40 0.11%
Total - current liabilities 125.90 30.50% 46.70 12.29%
Total Liabilities 205.60 49.81% 182.90 48.14%
TOTAL EQUITY AND LIABILITIES 412.80 100.00% 379.90 100.00%
Appendix 2: Vertical Trend Analysis.
Fuller Smith and Turner Plc Group Statement of Comprehensive Income.
2010 2009
Revenue 100 100
Cost of Sales 32.14% 32.52%
Gross Profit 67.85% 67.47%
other Income before exceptional items 0% 0.01%
other Income after exceptional items 0.48% 0%
Operating Expenses before exceptional items 53.79% 53.66%
Operating Expenses after exceptional items 54.19% 57.66%Finance Costs 2.37% 3.04%
Profit before tax before exceptional items 11.68% 10.85%
Profit before tax after exceptional items 11.76% 6.95%
Income tax expense before exceptional items 3.29% 3.14%
Income tax expense after exceptional items 3.33% 2.61%
Profit after tax before exceptional items 8.39% 7.71%
Profit after tax after exceptional items 8.47% 4.34%
Operating Profit before exceptional items 8.38% 7.71%
Operating Profit after exceptional items 8.43% 4.20%
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APPENDIX 3 horizontal Trend Analysis of Comprehensive Statement of Position
2010 2009
ASSETSm m % change
Non Current AssetsProperty Plant and equipment 348.20 318.70 9.26%
Goodwill 23.90 24.10 -0.83%
Deferred tax assets 6.10 5.00 22.00%
Other non-current assets 9.70 9.10 6.59%
Total non-current assets 387.90 356.90 8.69%
Current Assets
Inventories 7.60 6.10 24.59%
Assets held for resale 0.60 0.00
Trade Receivables 15.60 16.00 -2.50%Cash and cash equivalents 1.10 0.90 22.22%
Total current assets 24.90 23.00 8.26%
TOTAL ASSETS 412.80 379.90 8.66%
Equity and Liabilities
Share capital 22.80 22.80 0.00%
Share Premium 4.80 4.80 0.00%
Retained earnings 180.90 173.30 4.39%
Other components of equity -1.30 -3.90 -66.67%
Total equity 207.20 197.00 5.18%
Non-Current Liabilities
Long-term borrowings 27.40 86.30 -68.25%
Derivative financial instruments 0.00 1.50 -100.00%
Pension commitments 12.70 8.40 51.19%
Deferred tax liabilities 37.50 37.60 -0.27%
Other non-current liabilities
Long term provisions 2.10 2.40 -12.50%
Total non-current liabilities 79.7 136.2 -41.48%
Current Liabilities
Current borrowings 81.40 8.80 825.00%
Derivative financial instruments 0.60 0.00
Trade payables 39.70 33.60 18.15%
Current tax payable 3.80 3.90 -2.56%
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Provisions 0.40 0.40 0.00%
Total - current liabilities 125.90 46.70 169.59%
Total Liabilities 205.60 182.90 12.41%
TOTAL EQUITY AND LIABILITIES 412.80 379.90 8.66%
APPENDIX 4: Horizontal Trend Analysis of Comprehensive Income
2010 2009 % change
m m
Revenue227.7 210 8.43%
Cost of Sales 73.2 68.3 7.17%
Gross Profit 154.5 141.7 9.03%
other Income before exceptional items 0 0.2 -100.00%
other Income after exceptional items 1.1 0 0.00%
Operating Expenses before exceptional items 122.5 112.7 8.70%
Operating Expenses after exceptional items 123.4 121.1 1.90%
Finance Costs 5.4 6.4 -15.63%
Profit before tax before exceptional items 26.6 22.8 16.67%Profit before tax after exceptional items 26.8 14.6 83.56%
Income tax expense before exceptional items 7.5 6.6 13.64%
Income tax expense after exceptional items 7.6 5.5 38.18%
Profit after tax before exceptional items 19.1 16.2 17.90%
Profit after tax after exceptional items 19.2 9.1 110.99%
Operating Profit before exceptional items 19.1 16.2 17.90%
Operating Profit after exceptional items 19.2 8.9 115.73%
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Appendix 5: Financial Ratios of Fuller Smith and Turner Plc Group
2010 2009
Profitability:
Metri
c
Pre
Excepti
onal
Items
Post
Exceptional
Items
Pre
Exception
al Items
Post
Exception
al Items
Benchmar
k
Return
on
Capital
Employ
ed
(ROCE
)
Return on
capital
employed =
(Net profit
before tax and
interest/capital
employed) X
100 % 8.40% 8.40% 7.8 ~ 8% 8%
Average
Return
Return
on
Assets
(ROA)
Return on
Assets = Profit
before tax and
interest/tax
assets) X 100 %
6.44 ~
6% 6.49 ~ 6% 6% 3.84 ~ 4%
Net
Profit(NP)
Net Profit = (
Net profit
before interest
and tax /
Revenue) X100 % 11.68 ~12% 11.76 ~ 12% 10.08 ~10% 6.95 ~ 7%
2010 2009
Asset
Turnov
er
(ATO)
Asset turnover
= (Revenue /
assets) times 0.55 0.55
Gross
Profit(GP)
gross Profit =
(Gross Profit/
Revenue) X100 % 67.85 ~ 68% 67.47 ~ 67%
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Efficiency 2010 2009
Debtors
(receiva
bles)
collection
period
(DCP)
Debtors
(Receivables)
collection
period = (
Tradereceivables/rev
enue of sales)
X 365 days 25 days 28 days
Credito
rs/Paya
bles
period
(CPP)
Creditors/Paya
bles period =
(Trade
Payables / Cost
of sales or
purchase) X
365 days 198 days 180 days
Invento
ries
Turnov
er
(ITO)
Inventory
Turnover =
(Average of
closing
Inventory /
Cost of sales or
revenues) X
365 days 38 days 33 days
Liquidity 2010 2009current
or
workin
g
capital
Current
Assets/Current
Liabilities x:1 0.19 : 1 0.49 : 1 High Risk
quick
or acid
test
ratio
(Current Assets
-
inventories)/Cu
rrent Liabilities x:1 0.137 : 1 0.361 : 1 High Risk
Gearing 2010 2009
Gearing
(Fixed Interest
Capital /
Capital
Employed) X
100 % 34.43 ~ 34% 32.55 ~ 33%
Average
to Low
risk
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Formulae Used:
Profitability:
Return on capital employed = (Net profit before
tax and interest/capital employed) X 100 ROCE (%)
Return on Assets = Profit before tax and
interest/tax assets) X 100 ROA (%)
Asset turnover = (Revenue / assets) ATO
gross Profit = (Gross Profit/ Revenue) X 100 GP (%)
Net Profit = ( Net profit before interest and tax /
Revenue) X 100 NP (%)
Efficiency
Debtors (Receivables) collection period = (Trade receivables/revenue of sales) X 365 DCP (Days)
Creditors/Payables period = (Trade Payables /
Cost of sales or purchase) X 365 CPP (Days)
Inventory Turnover = (Average of closing
Inventory / Cost of sales or revenues) X 365 ITO (Days)
Liquidity
Ratio Formulae
Current Working Capital (Current Assets / Current Liabilities) = X:1
Quick or Acid Test ratio((Current Assets - Inventory)/ CurrentLiabilities) = X:1
Gearing
Ratio Formulae
Gearing
(Fixed Interest Capital / Capital Employed) X
100
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Answer No. 2:
a) Investment Appraisal evaluation:
1)
Net Present Value
(NPV)
Tax Wizard
Year Net Cash flow ( k) DCF PV (k)
0 -60 1 -60
1 25 0.91 22.75
2 30 0.83 24.9
3 32 0.75 24
NPV (
k) 11.65
Tax Easy
Year Net Cash flow ( k) DCF PV (k)
0 -120 1 -120
1 50 0.91 45.5
2 70 0.83 58.1
3 40 0.75 30
NPV (
k) 13.6
Tax Angel
Year Net Cash flow ( k) DCF PV (k)
0 -180 1 -180
1 95 0.91 86.45
2 80 0.83 66.4
3 58 0.75 43.5
NPV (
k) 16.35
Profit Index calculations
Tax Wizard
Profit Index 19.41
Tax Easy
Profit Index 11.33
Tax Angel
Profit Index 9.08
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2) Internal Rate of Return (IRR)
Tax Wizard At DCF 10%
Year Net Cash flow ( k) DCF PV (k)0 -60 1 -60
1 25 0.909 22.72
2 30 0.826 24.78
3 32 0.751 24.03
NPV ( k) 11.53
Tax Wizard At DCF 20%
Year Net Cash flow ( k) DCF PV (k)
0 -60 1 -60
1 25 0.833 20.83
2 30 0.694 20.82
3 32 0.579 18.53
NPV ( k) 0.16 ~ 0
Tax Wizard IRR 20 %
Tax Easy At DCF 10%Year Net Cash flow ( k) DCF PV (k)
0 -120 1 -120
1 50 0.909 45.45
2 70 0.826 57.82
3 40 0.751 30.04
NPV ( k) 13.31
Tax Easy At DCF 20%
Year Net Cash flow ( k) DCF PV (k)
0 -120 1 -120
1 50 0.833 41.65
2 70 0.694 48.58
3 40 0.579 23.16
NPV ( k) -6.61
Tax Easy IRR 16.68%
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==================================================================
3) Payback
Tax Wizard
2 years 1.87 months
Tax Easy
2 years
Tax Angel
2 years 1.10 months
Tax Angel At DCF 10%
Year Net Cash flow ( k) DCF PV (k)
0 -180 1 -180
1 95 0.909 86.36
2 80 0.826 66.08
3 58 0.751 43.56
NPV ( k) 16
Tax Angel At DCF 20%
Year Net Cash flow ( k) DCF PV (k)
0 -180 1 -180
1 95 0.833 79.14
2 80 0.694 55.52
3 58 0.579 33.58
NPV ( k) -11.76
Tax Angel IRR 15.76%
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b) Selection of Product:
Whenever projects are considered by companies to invest it the factors like NPV, the payback
period and the IRR are considered. For the 3 software given in the problem statement the
summary is given as below:
Tax
Wizard Tax Easy Tax Angel
Net Present Value (NPV k) @
10% 11.53 13.31 16
Net Present Value (NPV k) @
20% 0 -6.61 -11.76
Payback period
2 years
1.87
months 2 years
2 years 3.10
months
IRR 19.86% 16.68% 15.76%
From the figures seen above it is clear that the Tax Wizard is the most suitable for investing.
Tax Wizard looks suitable because as compared to other 2 namely Tax Easy and Tax Angle,
as if the current scenario is considered when the cost of capital of company is 10 % the value
of NPV for Tax wizard is lowest that is 11.53, but when the forecast of financial director is
considered that the cost of capital could rise to 20%, Tax easy and Tax Angel would actually
give a negative NPV and the company might face a loss. However, the NPV of Tax wizard
would be almost zero thus giving the company no profit or loss.
The payback for Tax wizard is fair in comparison with the other 2 softwares.
The IRR for Tax Wizard is highest, up to 20% and that is the maximum as compared to other
two softwares.
The profit index for tax wizard is 19.41 which is the highest as compared to the other 2
software.
When the projects are considered as mutually exclusive Tax Wizard shows the high value for
PI and IRR but the NPV is 0 when DCF is 20%.
The advise to the board of directors would be not to invest in any software unless necessary
on the base of NPV calculation. But if there is a need to invest then TAX WIZARD would be
a better choice on the basis of IRR calculations.
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Answer 3:
Budgeting is the most important task for a organization as it helps to set targets, know the
potential and find means to increase the profit. There are many factors to be considered when
budget planning is to be done. One of the factors necessary for the success of the budget is
human behaviour. When budget planning is done the approach adopted for deciding the
budget plays an important role. The approaches are the top-down approach, the bottom-up
approach, the rolling budget approach and the feed forward approach. Adopting an approach
depends on the company and the motivation level of the employees of that company.
The top-down approach for budgeting.
This type of budgeting approach is usually followed by a company with senior and experienced
management officials. The top management officers give the budget to the managers with targets that
can be achievable on the basis of data analysed by them. However, it is sometimes seen that the
management expects too much form the employees to achieve thus reducing their motivation andresulting into low productivity. This type of budget can lead the lower-level managers to find
themselves in a position of doubt to complete the unrealistic targets for their team. There is also a
positive side to this type of budgeting approach where the organization can actually be managed well
in terms of efficiency and capital invested. This kind of budget is the best type of communication
from the top management to the employees to perform accordingly (Walther,L and Skousen,C (2010)
Budgeting : Planning for success ).
Source: Walther,L and Skousen,C (2010) Budgeting : Planning for success
For example if sales budget is was 200 items in the previous year and according the new budget this
year it is expected as 400 items the morale of the employee is affected as the target seems to be un
achievable to them, however if this years budget expects a sale of 250 items, the morale of the
employee is of doubt but they can actually take it as a acceptable target to achieve and will give it a
try (Perks. R, and Leiwy, D. (2010), Accounting: understanding and practice, McGraw Hill, 3rd edition,
pg.328.). Thus they can prove themselves worth for the challenge and improving their motivation to
do their work.
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Bottom-Up approach:
Source: Walther,L and Skousen,C (2010) Budgeting : Planning for success
The bottom-up approach for budgeting is used mostly by well established organizations. This type of
budget is the most acceptable budget when it comes to the employees involved. This budgeting
approach is also called participative budgeting technique as all the departments are involved in
planning the budget. The planning of this budget works with all the departments involved presenting
their individual budget to plan the main budget of the organization. This budget has proved to
improve and enhance the motivation level of the employees as the target given to them is more
realistic. Even when the budget planning takes considerable amount of time there are more chances
of this kind of budget to achieve the objective defined.
For example, if the sale department gives an estimated sale they can do in that financial year, the
manufacturing department should be capable to produce that much of the product for the sales
department to sell. However all the facts and figures are checked and compiled by the management
and an achievable target is given to all the departments.
Rolling Budget.
This type of approach employs budgeting for shorter intervals like a quarter. In this approach the
targets are continuously monitored for a quarter and updated simultaneously. This type of budgets
are more suitable for the organizations with limited amount of working capital where taking is a loss
can cause them going out of business. The employees are often seen with limited productivity as the
motivation level to work is less for a reason that they can be forced more and more to achieve
targets as compared to the previous quarter.
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Budgetary slack.
Most of the time this problem is faced by the accounting managers while making the budget. The
figures provided by the different departments are hyped to achieve bonus or incentives, but later
after the actual practice of the budged the departments lag behind, this is called the budgetary
slack. This has to be kept in concern while planning the budget whether the concerned department
who are interdependent can cope up with the individual figures provided.
The human behaviour is thus the crucial factor while planning the budget, as people are involved in
all the operations from manufacturing or from sales or from service as well. When people are
involved in budgetary planning process it is seen most of the time that problem solving is quite
effective and employees from departments negotiate with the other departments and come up on
achievable targets as people are to work out the budgets Hopwood, A (1974).
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References
Perks. R, and Leiwy, D. (2010), Accounting: understanding and practice. 3rd Ed. New York: McGraw
Hill.
Raiborn et al (2000), Managerial Accounting. USA: West Publication Company.
Hopwood, A (1974), Accounting and Human Behaviour. London: Haymarket Publishing
Walther,L and Skousen,C (2010) Budgeting : Planning for success