6. Using the full list of ratios and formulas as outlined on the ratio analysis worksheet provided below, calculate each of the stated ratios for the company "honey bun Limited" for the past three (3) financial years (i.e., the years ending 2019, 2020, and 2021) above.

all three years were added 2019, 2020, 2021

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Question below

calculate the stated ratios for the company honey bun Limited for the past three (3) financial years (i.e., the years ending 2019, 2020, and 2021). then to prepare a detailed trend analysis discussion for the companies over the same period. Your analyses should reference the results of the ratios calculated and must incorporate the use of graphs/charts. Your discussion should go beyond simply stating the trend observed, The discussion of the trend for each ratio should be done in one to two welldeveloped paragraphs.

Note: Common Equity = Capital and Reserves Preference Shares Capital Employed = Capital and Reserves + Non-Current Liabilities Average Stock =( Opening Stock + Closing Stock )2 INTRODUCTION TO FINANCIAL ACCOUNTING (ACC2001) LECTURE NOTES UNIT 6 - RATIO ANALYSIS The preparation and presentation of financial statements are done for a given period, with the aim being to highlight the performance and financial position of the firm for that period. There are various users of the financial statements, and each category of users may require information for quite different purposes. THE USE OF RATIOS In almost all the cases however, the users of the financial statements need to look beyond the information as presented in the statements. A more in-depth and meaningful assessment can be done by way of a set of accounting ratios. Ratios are analytical tools used to assess the performance and financial position of a company by comparing related items from the income statement and/or the balance sheet. Ratios aid in determining areas of positive and negative performance, thus enabling the company to formulate appropriate strategies for improvement or growth. HOW RATIOS ARE EXPRESSED There are various ways in which the numerical values obtained from ratio calculations may be expressed. Among these are: a) x%, comparing an item as a component or subset of a bigger unit b) x number of times, or x days, measuring the rate of usage or occurrence of an item c) x:1, comparing one item in relation to another item BASES FOR COMPARISON The figures calculated are static data that would not say much by themselves. To be meaningful, the ratios must be compared against some other benchmark factor, such as: 1. Prior period figures. The use of historical data allows for a trend analysis to be made, noting any change in the results over the years. The change may reflect an increase, a decrease, a fluctuation, or the figures remaining constant. 2. Industry averages. The firm's results may be compared with the averages from the industry. This ranking of the company with the norms of the industry is part of the industry analysis. Note however that the industry may comprise firms of varying factors such as size, age, operational issues, business environment, external influences. 3. Competitor averages. This comparison is called a competitor's analysis. It is especially useful where the two firms are of similar size and are main contenders in an industry. However, the firms may tend to have differing internal policies and operational procedures which are not apparent in the financial statements. CALCULATION AND INTERPRETATION OF RATIOS LIQUIDITY RATIOS These measure the company's short-term liquidity position, i.e., the ability to meet its current obligations or the extent to which the firm can cover its current liabilities from its current assets. This is expressed as x:1. The x value represents the amount of current asset to each unit of current liability. The x value should ideally be greater than one and be on an increasing trend. However, it should not be too high, as it would indicate an excessively liquid position. \begin{tabular}{|l|} \hline Acid Test Ratio (Current Assets Closing Stock ) Current Liabilities \\ \hline \end{tabular} This too is expressed as x:1. It is a refinement of the current ratio, and has the same interpretation. The removal of the stock means that the assessment is being done based on the other more liquid items. This is especially practical for firms whose stock is unique or cannot be easily sold or liquidated in its present unprocessed state. SOLVENCY RATIOS These give an indication of the long-term financial strength of the company. They can be used as a bench mark for investment options, securing external financing, or when making long term decisions. Solvency ratios are also used to assess the level of financial risk exposure involved in the business. Total Assets to Total Liabilities Total Assets Total Liabilities This is expressed as x:1. The x value represents the total amount of asset to each unit of combined liability. The x value should ideally be greater than one, and be on an increasing trend. It shows the overall level of financial strength in the business. Debt to Common Equity (Non-Current Liabilities + Preference Shares) Common Equity NB. Common Equity = Capital \& Reserves Preference Shares This is expressed as x:1. The x value represents the amount of debt to each unit of common equity. It should ideally be less than one and be on a decreasing trend. The ratio gives an indication of the level of risk in the financing of the business, arising from external debt. Note that the preference shares capital is grouped with the non-current liability because it usually carries a fixed rate of dividends, thus making it an obligatory debt to the firm. Gearing Ratio (Non-Current Liabilities + Preference Shares) Capital Employed x 100 NB. Capital Employed = Capital \& Reserves + Non-Current Liabilities This is expressed as x%. The x value indicates the percentage of financing that is in the form of debt. It should be on a decreasing trend to indicate financial strength and minimized risk exposure. The interpretation is similar to the Debt to Common Equity ratio above. PROFITABILITY RATIOS There are various forms of profitability ratios, each expressing a different measure. Among them are: Effective control of costs This is expressed as x%. It indicates the proportion of sales that is recouped as net profit. The x value should be increasing. It gives an indication of good control over the total costs inclusive of the operating expenses. Efficiency in the use of assets Return on Assets Profit before Interest and Tax Total Assets x 100 This is expressed as x%. It indicates the level of profits earned in comparison to each unit of asset invested or deployed. The x value should be increasing. Return on investments \begin{tabular}{|l|} \hline Return on Capital Employed \\ Profit before Interest and Tax Capital Employed x 100 \\ NB. Capital Employed = Capital \& Reserves + Non-Current Liabilities \\ \hline \end{tabular} This is expressed as x%. It indicates the level of profits earned in comparison to each unit of financing by both debt and equity. The x value should be increasing. Return on Shareholders' Equity (Profit after Tax - Preference Dividends) Common Equity x 100 NB. Common Equity = Capital & Reserves - Preference Shares This is expressed as x%. It indicates the level of profits earned in comparison to each unit of financing from common equity. The x value should be increasing. ASSET MANAGEMENT RATIOS These measure the rate of usage or the effective use of the entity's resources. There are two aspects to each ratio in this category: (i) the ratio is expressed as x times which generally should be trending up, and (ii) the ratio is expressed as x days which should be trending downwards. Stock Turnover Cost of Sales Average Stock NB. Average Stock =( Opening Stock + Closing Stock )2 This is expressed as x times. It indicates the rate of sale of the stock. The x value should be increasing. This means that the stock is moving fast, thus minimizing a tying up of capital and related costs associated with the holding of inventory for too long. This is expressed as x days. It indicates the number of days that stock is being held in the firm. The x value should be decreasing. This means that the stock is moving fast, thus minimizing a tying up of capital and related cost associated with the holding of inventory for too long. Debtors Turnover Sales Debtors NB. Some analysts use credit sales instead of total sales This is expressed as x times. It indicates the extent to which the sales revenue has been collected from credit customers. The x value should be increasing. This means that more of the sales revenue is being collected, thus minimizing the possibilities of a bad debt. Debtors Turnover Period 365 Debtors Sales NB. Some analysts use credit sales instead of total sales This is expressed as x days. It indicates the number of days it takes to receive payment from debtors. The x value should be decreasing. This means that credit customers are paying up at a faster rate, thus enhancing the cash flow, and minimizing the possibilities of a bad debt. Creditors Turnover Purchases Creditors NB. Some analysts use credit purchases instead of total purchases This is expressed as x times. It indicates the extent to which credit purchases have been paid off. The x value should be increasing. This means that goods purchased have been paid for at a faster rate, thus improving the firm's credit rating and minimizing transaction and interest cost. Creditors Turnover Period 365 Creditors Purchases NB. Some analysts use the credit purchases instead of total purchases This is expressed as x days. It indicates the number of days it takes to pay suppliers. The x value should be decreasing. This means that goods purchased have been paid for at a faster rate, thus improving the firm's credit rating and minimizing transaction and interest cost. INVESTMENT RATIOS There are a number of investment ratios that can be incorporated into the assessment of a company. These give an indication of the firm's relationship with its investors as well as with the financial markets. This is expressed as x times. This ratio shows a comparison between how much investors are willing to pay for the shares and the dollar value of reported profits. An increasing value means that investors are showing a high level of confidence in the company. This is expressed as x times. The TIE is a measure of the company's ability to meet its debt obligations. The x value should be increasing, thus indicating greater ability to meet its interest payments. Higher times interest earned also indicates greater potentials to secure funding in the future. THE USE OF NON-FINANCIAL DATA Ratio analysis is a very good means of analysing the performance and financial position of the business. It would be useful however to extend the analysis by incorporating non-financial data. This would serve to explain or substantiate aspects of the firm's results. Among the body of nonfinancial data are: - An understanding of the philosophy or vision of the company - Details about the operational policies and procedures of the company - The management style in the company - The nature of the industrial relations and human resources principles - The location of the business - The legal/political business climate - The behavioural and psychographic profile of the market - The nature of the business environment - Exposure to natural disaster or external threats These non-financial variables are usually incorporated when conducting a SWOT analysis. They allow for useful reasoning and explanation of the results obtained in the ratio analysis. They also provide insight into the internal and external business environment, and aid in the formulation of goals and operational strategies for the business. LIMITATIONS OF RATIOS Despite ratio analysis being an effective tool for the evaluation of a business enterprise, there are various limitations in its use. Among these are: LIMITATIONS OF RATIOS Despite ratio analysis being an effective tool for the evaluation of a business enterprise, there are various limitations in its use. Among these are: - There are variations in the items used in the calculation of ratios. e.g. the non-current assets may be taken at cost, or at net book value. Also, intangible assets such as goodwill may be included or omitted. - There are variations in the interpretations of the results. e.g. is net profit margin a sign of prudent cost control, or the lack of effective spending in such areas as marketing or staff developmental cost? - While ratios may signal a problem, they do not indicate the cause of the problem. - Given that there are various users of financial statements, each with differing focus and emphasis, ratios may mean different things to different persons. - Ratios are static data that require a basis for comparison. - Ratios are subjected to manipulations. - By themselves ratios do not give a full indication of the performance and position of the firm. They need non-financial data to give a more in-depth picture. The following summarized financial statements were provided by Myrna Hague for 2015 : Required: 1. Calculate appropriate ratios under the headings of liquidity, solvency, profitability, asset management and investment for Myrna Hague for the year 2015. 2. Data is provided for Myrna Hague's previous years. Comment on the performance and financial position of the firm for 2015 in comparison to 2013 and 2014. 8 Solution to lecture question Liquidity Ratios Liquidity ratios measure of the firm's short-term financial position, or the ability to meet current obligations. There has been an improvement in the company's ability to meet current obligations in relation to the total current assets. This is evidenced by the current ratio which has increased steadily from 1.82 in 2013 to 2.96 in 2015. Also, in the context of the acid test ratio I improvement in the short-term financial position, as this ratio moved from 1.14 in U15 to 2.48 in 2015. Liquidity Ratios Liquidity ratios measure of the firm's short-term financial position, or the ability to meet current obligations. There has been an improvement in the company's ability to meet current obligations in relation to the total current assets. This is evidenced by the current ratio which has increased steadily from 1.82 in 2013 to 2.96 in 2015. Also, in the context of the acid test ratio, there has been an improvement in the short-term financial position, as this ratio moved from 1.14 in 2013 to 2.48 in 2015 . Solvency Ratios Solvency ratios measure the firm's long-term financial position, especially for investment options. They also indicate the level of financial risk of the business. The firm's overall financial position has improved over the three-year period. This is evidenced by the total assets to total liabilities which has moved from 3.65 in 2013 to 4.15 in 2015 . The debt to common equity and the gearing ratios have also shown improvements as the level of debt financing has moved from 0.63:1 or 38.65% in 2013 to 0.51:1 or 33.78% in 2015 . This improved financial standing means there is a reduction in the financial risk situation of the firm, thus putting it in a better position to secure external financing, and to make better long-term investment decisions. Profitability Ratios Profitability ratios measure the firm's ability to control cost. Also, they indicate the levels of efficiency in the use of the resources, and the levels of return on investment. There has been a decline in the firm's ability to control its costs. This can be deduced from the reduction in the net profit margin, which gives an indication of the control of costs and expenses, moving from 42.85% in 2013 to 34.75% in 2015 . Decline in profits, however, may not be entirely due to lack of control of costs. There may be greater expenditure on cost of sales which may result in an improved quality of the output. Similarly, there may be planned expenditure on marketing, staff development, corporate social responsibility, and operational efficiencies. These may result in reduced profit in the short run, but greater goodwill and earning potentials in the long run. There was a fluctuation in the levels of efficiency in the use of the assets, as was measured by return on assets. The fluctuations may be due in part to the nature and quality of the assets, especially the non-current assets. The firm may have acquired very expensive items of fixed assets which are not fully deployed into operation. Or, on the other hand the firm may have a significant amount of older assets on the books but they are in need of major maintenance and repairs, thus reducing their output capacity while incurring higher maintenance costs. In the areas of returns on investments, there was a noticeable increase in the returns to the financiers, as indicated by both the return on capital employed which moved from 38.52% in 2013 to 42.22% in 2015; as well as the return on shareholders' equity which moved from 49.07% in 2013 to 55.97% in 2015 . It can be noted that with the reduction in the external debt the returns to the ordinary shareholders has increased. Asset Management Ratios Asset management ratios measure the firm's effective use or management of various resources. Stock Turnover There has been a decline in Myrna Hague's ability to effectively utilize or manage its stock over the years. This is based on the fact that the stock has been turning over just 11.4 times (or every 32 days) last year compared to the faster turnover of 18.43 times (or every 20 days) in 2013. 10 Higher turnover times (or correspondingly lower turnover days) would indicate a faster usage of stock to generate sales, and also that there is lesser tying up of capital in stock being held. Debtors Turnover Myrna Hague has been reporting a decline in the rate of collection from credit customers. The turnover rate has moved from 8.33 times (or every 43.82 days) in 2013 to 4.26 times (or 85.78 days) in 2015. Customers taking longer time to pay may result in more bad debts and may also lower the cash inflow thus affecting the ability to meet other financial obligations. However, from a marketing perspective, customers may be more inclined to buy from the firm that allows them longer time to pay. Creditors Turnover Myrna Hague has been paying its suppliers at a faster rate now than in previous years. The creditors turnover rate has moved from 4.11 times (or 88.81 days) in 2013 to 5.78 times (or 63.18 days) in 2015 . A faster rate of payment to one's suppliers would likely increase the firm's credit rating thus making it more eligible for more favourable considerations in the future. However, where suppliers are willing to hold out on their collections the firm may choose to capitalize on this, thus preserving its cash flow for other more pressing financial demands. Investment Ratios Investment ratios are a measure of the firm's relationship with its investors, as well as with the financial market. Price Earnings Ratio Myrna Hague has seen an increasing expression of confidence in the company by investors. Relative to each unit of profit earned, shareholders are willing to purchase the company's shares at market prices 1.42 times more than the earning potential of the shares in 2015 , up from 1.17 times in 2013. Times Interest Earned Myrna Hague's ability to cover its interest charges from profits has increased over the three-year period, moving from 22.17 times in 2013 to 26.39 times in 2015 . With an increasing times interest earned, Myrna Hague has a greater potential to secure funding in the future. HONEY BUN (1982) LIMITED Statement of Financial Position Sentemher 207010 The financial statements on pages 8 to 47 were approved for issue by the Board of Directors on November 28, 2019 and signed on its behalf by The accompanying notes form an integral part of the financial statements. Statement of Profit or Ioss and Other Comnrehensive Income Statement of Changes in Equity Year ended September 30, 2019 (Expressed in Jamaica dollar unless otherwise stated) Approved for issue by the Board of Directors on 29 November 2021 and signed on its behalf by: Herbert Chong Chairman CharlesHeholt-Director YY BUN ANNUAL REPORT 2021 STATEMENT OF CASH FLOWS YEAR ENDED 30 SEPTEMBER 2021 HONEY BUN (1982) LIMITED Statement of Cash Flows Year ended September 30, 2019 (Expressed in Jamaica dollar unless otherwise stated) HONEY BUN (1982) LIMITED HONEY BUN (1982) LIMITED STATEMENT OF CHANGES IN EQUITY STATEMENT OF CASH FLOWS YEAR ENDED 30 SEPTEMBER 2020 YEAR ENDED 30 SEPTEMBER 2020 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME YEAR ENDED 30 SEPTEMBER 2021 STATEMENT OF CHANGES IN EQUITY YEAR ENDED 30 SEPTEMBER 2021 HONEY BUN (1982) LIMITED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME YEAR ENDED 30 SEPTEMBER 2020 HONEY BUN (1982) LIMITED STATEMENT OF CHANGES IN EQUITY YEAR ENDED 30 SEPTEMBER 2020 HONEY BUN (1982) LIMITED STATEMENT OF FINANCIAL POSITION .01004 HONEY BUN (1982) LIMITED STATEMENT OF CASH FLOWS YEAR ENDED 30 SEPTEMBER 2020