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Analysis and Application of Financial Information

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Table of Contents
Task 2.........................................................................................................................................3

General questions.....................................................................................................................10

References................................................................................................................................15
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Task 2
Scenario 1

1. Role of financial manager in managing finances: The formulation of long term

strategies for finance and investment decisions is taken care of by the finance managers in an
attempt to ensure financial viability of an organization. The various roles of financial
managers are enumerated as below:

 Review of financials of the organization and seeking ways for reduction of costs:
Financial managers are mainly concerned with ways such as to reduce costs which
directly impacts the profitability of the organization in a positive manner. In our
present case, ElectroChip Limited has not upgraded its safety and pollution control
systems which has resulted into the requirements of the new machinery not being met.
It has also made certain decisions like discontinuing with its efforts to support the
local charity and displacement of experienced employees of the organization who are
on a higher scale of pay in favour of new recruits straight out of college. These are all
instances of cost saving measures initiated by the management of the organization.
 Assisting management in making financial decisions: The role of financial
manager is to help the management in making financial decisions. In our present case,
the decision of the organization ElectroChip Limited to invest in new machinery
through borrowing of funds from the Green Bank is considered to be an example in
this regard.
 Maximization of profits: Financial managers mostly undertake analysis of financial
data and provide the senior management with such ideas as to maximize the
profitability levels of the organization. In the present scenario, the implementation of
a profit sharing scheme for the managers and the non payment of cash dividends to
the shareholders of the organization are considered as instances in this
respect[ CITATION Lum202 \l 16393 ].

2a. Listing of three stakeholders affected by cost saving and efficiency measures of the
organization: The employees, shareholders, and the local community are considered to be
most impacted by the cost saving and efficiency measures of the organization.
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ElectroChip Limited has not paid cash dividends to the shareholders of the organization for
the past 6 years which has affected its shareholders in a significant way. The displacement of
experienced employees as they are on a higher scale of pay in favour of new recruits straight
out of college is an instance where the interests of employees are hurt in an adverse manner.
Moreover in an attempt to lower costs, the organization has not done any up gradation of its
safety and pollution control systems which has resulted into emissions impacting the local
community.

2b. Steps to ensure stakeholder requirements are met: Ethics are set of moral principles
which act as guiding principle for the conduct of behaviour by persons. The development of
these morals is through cultural practices, social norms, and religious beliefs. Ethical
behaviour is mainly based on the written and unwritten values and codes of principles
generally held in the society.

Professional ethics is mainly demonstrated by professionals like accountants, managers,

lawyers, and such other persons who demonstrate specialised skills and knowledge while
providing services to the general mass. Culture is mainly dependent on the ethical norms and
moral values that act as governing principle regarding how people should conduct and
interact with others in the society. It reflects a collective way of doing things or way of
life[ CITATION Int20 \l 16393 ].

Shareholders are considered as owners of the organization and hence the decision of non
payment of dividends for the past 6 years is considered as unprofessional. If shareholders are
not properly compensated for their investments in the organization, they may not stay
invested in the company in the future years. As the profits of the company are rising on a
consistent basis for the past three years, it should start the process of payment of dividends to
shareholders with immediate effect.

The displacement of experienced employees who are on a higher scale of pay in the
organization in favour of new recruits who are just out of college is considered to be against
the ethical, social, and cultural norms of the organization. Experienced employees are
considered to be the pillars for the organization and hence they should be immediately
restored in the services of the organization. As their pay scale is higher, the company may
make a certain portion of their pay as fixed and make the rest variable as per their
performances such as to ensure that there is not much difference in their take home salaries.
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The safety and pollution control systems are not upgraded such as to save on costs for the
organization. Such decisions are considered to be against the ethical, social, and cultural
norms of the organization. The pollution control systems must be upgraded following the
prescribed regulations and the systems for safety should be upgraded such as to comply with
the regulations and safety standards. Training needs in this respect should also be identified
by the human resources department in consultation with line managers. This would ensure
that the requirements of society, local community, and that of workers are met in an effective
manner.

3. Principal and the agent identification in the relationship of agency: The organization
ElectroChip Limited is considered to be the principle while the Chief Financial Officer and
the Chief Operating Officer are considered as agents of the organization.

The profitability of the organization ElectroChip Limited has increased on a consistent basis
during the last three years due to efficiency and cost saving measures being initiated by the
organization. It has not upgraded its safety and pollution control systems such as to save on
costs. The decisions with respect to discontinuing its efforts to support the local charity and
displacing experienced employees who are on a higher scale of pay in favour of new recruits
who are just out of college are also cost saving measures initiated by the organization. The
organization has also overhauled its wasteful processes and introduced efficient methods for
working. The investment in new machinery is considered to be a part of this strategy. As a
result, the profitability of the organization has increased on a consistent basis during the last
three years.

The non payment of cash dividends to the shareholders of the organization for the past six
years has led to the general perception that ElectroChip Limited doesn’t care for them which
in turn led to decrease in the prices of shares of the company by $5.50 per share over the last
fifteen months.
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Scenario 2

4. Ratio and trend analysis

Calculation of Ratios
Ratio Formula         Year 2019 Year 2018 Year 2017 Year 2016
300,000 120,000 90,000 181,000
1.  Gross profit Gross profit/Net 720,000× 100 =41.67 =17.65 =12.86
680,000× 100 700,000× 100 810,000× 100
=22.35
margin Sales
90,000 15,840 5,040 17,920
2.  Net profit Net profit/Net =0.1250 =0.0233 =0.0072 =0.0221
720,000 680,000 700,000 810,000
margin Sales
143,000 40,000 22,000 99,000
3.  Operating =19.86 =5.88 =3.14 =12.22
720,000× 100 680,000× 100 700,000× 100 810,000× 100
profit margin EBIT/Net Sales
Net profit/Total 90,000 15,840 5,040 17,920
=47.87 =9.60 =3.73 =13.58
4.  Return on shareholders' 188,000× 100 165,000× 100 135,000× 100 132,000× 100
equity ratio equity
90,000 15,840 5,040 17,920
5.  Return on Net profit/Total 378,000× 100 =23.81 =3.86 =1.13
410,000 ×100 445,000 ×100 462,000 ×100
=3.88
assets ratio assets
720,000 680,000 700,000 810,000
6. Total asset Net sales/Total =1.90 =1.658 =1.573 =1.753
378,000 410,000 445,000 462,000
turnover ratio assets
720,000 680,000 700,000 810,000
7.  Fixed asset Net sales/Fixed =2.4 =2.194 =2.258 =2.613
300,000 310,000 310,000 310,000
turnover ratio assets
420,000 560,000 610,000 629,000
=9.33 =8.13
Cost of goods 38,000 60,000 75,000 70,000
8. Inventory sold/Avg. ¿ 11.05 ¿ 8.99
turnover ratio Inventory
720,000 680,000 700,000 810,000
=11.826 =10.219 =13.5
9.  Trade Net sales/Avg. 51,000 57,500 68,500 60,000
receivable Trade ¿ 14.118
turnover ratio receivables
10.   Age of 365 365 365 365
=25.85 =30.86 =35.72 =27.04
trade 365/Receivables 14.118 11.826 10.219 13.5
receivable ratio ' turnover
300,000 350,000 40,000 50,000
11.   Age of Payables/COGS 420,000 ×365 =26.07 =22.81 =23.93
560,000× 365 610,000× 365 629,000× 365
=29.01
creditors ratio *365
78,000 100,000 135,000 152,000
=1.67 =2.077 =2.027
Current 65,000 60,000 65,000 75,000
12.   Current assets/Current ¿ 1.2
ratio liabilities
78,000−¿ 26,000−0
100,000−¿ 50,000−0
135,000−¿ 70,000−0
152,000−¿ 80,000−0
=0.83 =0.96
Quick 65,000 60,000 65,000 75,000
13.   Quick assets/Current ¿ 0.80 ¿1
ratio liabilities
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143,000 40,000 22,000 99,000

18,000 18,000 15,000 35,000
14.   Interest EBIT/Interest ¿ 7.94 ¿ 2.22 ¿ 1.467 ¿ 2.829
coverage ratio charges
125,000 185,000 245,000 255,000
Long term 188,000 165,000 135,000 132,000
15.  Debt loan/Shareholde ¿ 0.6649 ¿ 1.1212 ¿ 1.8148 ¿ 1.9318
Equity Ratio rs' equity
Shareholders' 188,000 165,000 135,000 132,000
=49.735 =40.244 =30.337 =28.57
16.  Proprietary equity/Total 378,000× 100 410,000 ×100 445,000 ×100 462,000 ×100
Ratio assets

Profitability ratios

 Gross profit margin: The margin of gross profit has increased from 22.35% in the
year 2016 to 41.67% in the year 2019. It implies that the organization is able to
conduct its operations in a profitable manner though it has decreased in the years 2017
and 2018 and hence needs to be closely monitored such as to maintain profitability of
operations.
 Net profit margin: The margin of net profit has increased from 2.21% in the year
2016 to 12.50% in the year 2019. It implies that the organization is able to conduct its
operations profitably though it has decreased in the years 2017 and 2018 and hence
needs to be closely monitored such as to maintain profitability of operations.
 Operating profit margin: The operating margins for the organization have increased
from 12.22% in 2016 to 19.86% in the year 2019. It implies that the operating
efficiency of the organization has improved over the years leading to reduction in
operating costs which has resulted into enhancement of operating margins.
 Return on equity ratio: The return for equity shareholders has drastically improved
from 13.58% in the year 2016 to 47.87% in the year 2019. It is considered to be a
very profitable position for shareholders of Tegal Food Limited as they are getting
more returns and hence feel motivated to stay invested in the organization.

Efficiency ratios

 Total asset turnover ratio: This ratio has increased from 1.75 in 2016 to 1.90 in the
year 2019. It reflects the intensity with which the assets of the organization are
utilized such as to generate sales and is considered to be an important determinant of
future cash inflows for the organization.
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 Fixed asset turnover ratio: The ratio has decreased from 2.61 in the year 2016 to
2.40 in the year 2019. This ratio is considered to reflect the profitable use of non-
current assets of the organization such as to generate more sales revenue. The decline
in this ratio implies that the organization might have over invested in its plant and
machinery and other fixed assets.
 Inventory turnover ratio: This ratio has increased from 8.99 in the year 2016 to
11.05 in the year 2019. An increase in this ratio implies low levels of inventory for the
organization which is considered to increase profitability.
 Trade receivable turnover ratio: The ratio has increased from 13.50 in the year
2016 to 14.12 in the year 2019. A high ratio in this respect implies improvement in
collection procedures, tightening of credit policies, or an improvement in business
conditions.
 Age of trade receivable ratio: It is considered to be a rough approximation of the
average time taken such as to initiate collection from debtors. It has decreased from
27.04 in 2016 to 25.85 in the year of 2019. It is considered to be profitable for the
business as it would assist in the improvement of liquidity position of the
organization.
 Age of creditors ratio: The ratio has decreased from 29.01 in the year 2016 to 26.07
in the year of 2019. It is considered to be a rough approximation of the average time
taken to pay back the creditors. A decrease in this ratio is an indicator of strict credit
terms granted by the suppliers of the organization.

Liquidity and solvency ratios

 Current ratio: The ratio has decreased from 2.03 in the year 2016 to 1.20 in the year
of 2019. It implies that the liquidity position of the organization has deteriorated over
the years from 2016 to 2019.
 Quick ratio: It is considered as a more stringent test for liquidity as it excludes
inventory in its calculation. A ratio of 1:1 is considered as satisfactory in any industry.
The ratio has decreased from 0.96 in the year of 2016 to 0.80 in the year of 2019
implying liquidity problems for the organization.
 Interest coverage ratio: The ratio has improved from 2.83 in the year of 2016 to 7.94
in the year of 2019. It implies the ability of the organization to service its debt service
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costs and hence a higher ratio is considered to be an indicator of long term solvency
of the organization.
 Debt equity ratio: The ratio has decreased from 193.18% in the year of 2016 to
66.49% in the year of 2019. It implies that the reliance on long term debts has
gradually decreased for the organization. A ratio of less than 100% is considered as
satisfactory as it would show that the claims of owners are greater than that of its
lenders.
 Proprietary Ratio: The ratio has increased from 28.57% in the year 2016 to 49.74%
in the year of 2019. This ratio is an indicator of financial stability and solvency of the
organization in the long run. A high ratio in this respect is considered to provide a
large degree of security to the lenders as it implies more use of shareholders’ fund in
the acquisition of total assets for the organization.

General questions
5. Explanation of function and scope of financial statements

 Income statement: The income statement is considered to be one of the core

financial statements that are prepared by an organization such as to disclose the
sources of revenue and expenses over a period of time. It facilitates in the proper
reflection of profits or losses of an organization. It provides information with respect
to performance of organizations to the general mass[ CITATION Cor201 \l 16393 ].
 Balance Sheet: It is considered to provide a summary with respect to the
organization’s liabilities, assets, and shareholders’ equity at a particular point in time.
It is also known as the “statement of financial position” as it captures the financial
viability of an organization at a particular point in time. It shows the accounting
equation to be in balance[ CITATION Lum203 \l 16393 ].
 Statement of changes in equity: It provides explanations with respect to reasons for
changes in retained earnings, accumulated reserves, and share capital of an
organization over the concerned accounting period. It is considered to be the
reconciliation between opening and closing balances of shareholders’ equity. The new
issue of shares and dividend payments as well as movements in other reserves and
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retained earnings of an organization are considered to be reported in this

statement[ CITATION Cle20 \l 16393 ].
 Cash Flow statement: This statement is considered to provide information with
respect to the inflows and outflows of cash over an accounting period of an
organization. The cash basis of accounting is followed in the preparation of such
statements by an organization. The main purpose of cash flow statement is to provide
information with respect to sources and uses of cash and cash equivalents over the
accounting period and to facilitate reconciliation of opening cash and cash equivalents
balances with that of the closing balances for cash and cash equivalents[ CITATION
Ied20 \l 16393 ].

6. Explanation of three influencing factors for business investment decisions

 Capital rationing vs unlimited funds: Organizations are able to accept all profitable
independent projects that are considered to fetch reasonable rates of return under such
financial situation known as unlimited funds. They are considered to have unlimited
financial capacity such as to accept any profitable independent project. Capital
rationing is considered to be such a financial situation where organizations focus on
acceptance of more profitable projects as they are considered to have limited financial
capacity and hence seek to make best allocation of their resources. In other words, it
can be said that under capital rationing an organization has limited financial capacity
available for capital expenditures and are considered to have various projects
competing for this limited financial capacity[ CITATION Cor202 \l 16393 ].
 Independent vs mutually exclusive projects: Independent projects are considered to
be such projects which have no relation among themselves and facilitate evaluation
based on their respective profitability. Mutually exclusive projects are considered to
compete among themselves and hence only one can be accepted at the same point in
time. It implies that the acceptance of one specific project automatically rejects the
other project in case of mutually exclusive projects[ CITATION Cap20 \l 16393 ].
 Expansion vs replacement projects: The expansion of existing target markets or
product and service offerings is considered to be an expansion of the business of the
organization. Such kind of capital budgeting technique is undertaken by an
organization in the event of growth or surge in demand. A detailed financial analysis
is undertaken in this respect but not as detailed as in required in the case of expansion
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of organization into new target markets or product and service offerings. Replacement
projects in comparison refer to such projects where an organization seeks to replace
its outdated equipments with that of new equipments. This would lead to reduction in
the current cost of production and/or enhance the current level of sales for the
organization[ CITATION ROS20 \l 16393 ].

7. Identification and explanation of at least one evidence for each area of business

 Operations: The successful running of a local restaurant business requires the

organization to streamline the operations of the restaurant and to provide quality food.
The main reasons for failure of restaurant businesses are due to operational
inefficiencies like food waste, poor inventory management, and understaffing. It is of
utmost importance that a proper strategy for management of operations of the local
restaurant is in place. It comprises such steps like legislative, compliance, financials,
and effective management of staff with respect to various areas of the restaurant
business. The eight steps in this regard are enumerated as below:
1. Development of value driven relationship with that of staff,
2. Improvement of security of the restaurant premises,
3. Creation of a training manual such that staff members can follow the same,
4. Minimization of waste with respect to food and improve the bottom line,
5. Adherence to proper Safety and Health standards,
6. Equipping staff members with necessary tools such as to enhance satisfaction
of consumers,
7. Proper streamlining of the financials of the restaurant,
8. Improvement of ways for vendor management.
 Accounting: Bookkeeping for the restaurant business provides insight into the
performance of the restaurant for the past few months but it would be better if it
incorporates all its financials into online solutions for bookkeeping like Quickbooks
and Xero which can make a huge impact with respect to streamlining its payroll, sales
data for POS, payments to suppliers, and online sales. Such online solutions for
bookkeeping also have the potential to generate real time reports such as to facilitate
the management of the restaurant business in effective decision making.
 Sales and marketing: The best way to promote the local restaurant business is
through online upload of drool inducing images for high quality food. The online
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demand for high quality visual content is high and hence it is of utmost importance
that the restaurant uploads high quality images of delicious foods in its website as
well as in various platforms for social media in an attempt to draw hungry eyes. It
could also consider partnering with online food delivery applications as they
encourage consumers to visit the restaurant through programs for customer loyalty
and gamification. Online food delivery applications also provide consumers with
discount coupons such as to encourage them to visit the restaurant for a certain
number of times.
 Human resources: The successful operations of the local restaurant business are
mainly dependent on the reliability of restaurant staff members who work tirelessly
such as to provide high quality services to customers. Customers frequently visit the
restaurant mainly due to the unique experiences that it is considered to provide. The
restaurant industry is characterized by severe competition with rising costs and high
rentals and hence it is of utmost importance that the restaurant hires the right team and
creates a proper structure for human resources. There are considered to be five
departments in any restaurant business such as delivery staff, bar tenders, floor staff,
managerial staff, and kitchen staff. It may vary depending on the format of any
specific restaurant. Hence the function of the HR department is considered as unique
depending on the format and number of departments of the restaurant. But in any case
the functions of the HR department in management of such functions like food
handling and employment regulations, compliance management, performance
management, and recruitment are considered as indispensable.
 Risk management: It is very important for the restaurant business to properly
maintain its equipments and keep its employees safe and trained at all times. The
seven strategies for risk management with respect to keeping the business and
employees safe are enumerated as below:
1. Conduction of proper training of employees of the restaurant,
2. Use of latest technology in the restaurant,
3. Keeping the restaurant clean,
4. Proper maintenance of equipments of the restaurant,
5. Safety and Health codes,
6. Securing all licenses for restaurant,
7. Awareness with respect to food allergies.
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8. Selection of two factors that influence the valuation working and global capital
budgeting

 Taxation: The impact of income taxes is considered to be significant on the cash

flows of an organization. Varying countries have varying rates for income tax and
hence the same should be taken into consideration while making decisions with
respect to capital budgeting. An investment may look profitable without considering
the impact of income taxes but the same may be rejected after taking into account its
after tax cash flows. The liabilities with respect to taxation are considered to pose two
issues for an organization. First the outflows with respect to taxation are treated as an
additional item of business expenditure and that an increase in the rate of taxation has
the same impact as rise in costs of goods sold. The survival of business is mainly
dependent on its profitability and hence the impact of taxation is considered to be a
controlling factor which decides on the continuance of any business in a specific
country[ CITATION Acc202 \l 16393 ].
 Country risks: The organizations having operations in home country as well as in
other countries are considered to be global in their operations. The expansion of any
business organization beyond the geographical boundaries of its home country are
considered to be exposed to significant risk factors as compared to that with
organizations doing business within its home country. The sources of such risk
factors comprise economical, political, and cultural climates.
1. Political risk: This risk is considered to be a threat to managerial control,
earnings potential, and loss of assets of organizations due to political actions
in a specific country. The three main categories of political risk which are
considered to impact global operations of businesses are transfer risk,
operating risk, and risk of ownership.
2. Economic risk: The probability that a specific country would impose
economic regulations on global organizations such as to control or restrict
their operations are considered as economic risks. The sources of economic
risk considered to impact the global businesses of organizations are price
controls, tax policies, and exchange controls.
3. Cultural risk: It is considered to be such threat that a global organization
would fail at negotiations, engage in poor relations with customers, or would
commit a business blunder due to lack of adaptation and understanding of
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cultural differences that exist between home and foreign country. It could take
such forms like corporate risk, business risk, and national risk[ CITATION
Mel20 \l 16393 ].

References
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decisions. Retrieved from accountingformanagement.org:
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Capitalbudgetingtechniques. (2020, April 6). Independent and Mutually Exclusive Projects.

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https://www.capitalbudgetingtechniques.com/independent-and-mutually-exclusive-
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