Final Project Peyton Approved Data

You will prepare financial statements that will allow you to assess how profitable the business is. Below you will find the data required to make entries in your accounting workbook. Remember that you are following the business transactions for a six-month period from the initial stage of analysis and recording, through the reporting process. These transactions will include: the initial setup of the business sales purchases making payments to vendors paying store employees managing debt It will help you to print this document as you are making your entries in your workbook. Your textbook prepares you and can be used as a reference to assist you in completing this assignment. You should begin this project in Module Two.

Part 1 Ratio Analysis of Peyton Approved (six months performance) Ratios 2014 Margin Ratios Formula Gross Margin 61.7% Gross Margin / Total Revenues EBITDA Margin 48.6% EBITDA / Total Revenues Operating Margin 48.2% Operating Margin / Total Revenues Net Margin 48.0% Net Margin / Total Revenues Remarks Peyton earns 61.7% gross margins on its sales which means, its direct costs or cost of goods sold is only 39.1% of its sales which gives it huge comfort to meet other indirect costs and also the potential to earn high profit if it can control other indirect costs. EBITDA margin represents profit before depreciation, interest and tax expenses. Peyton has earned very high EBITDA margins driven by high gross margin on sales and hence is in a position to earn very high net profit. Operating margin represents profit before interest and taxes. Peyton's operating margin at 48.2% is driven by higher EBITDA margin and lower depreciation cost which talks about the less capital intensive business Peyton is running. Net margin is the net profit after taxes. In absence of tax information, it has been ignored. High operating margin and lower interest cost due to lower debt has translated into very net margin of 48% Liquidity Ratios Current Ratios 7.1 Quick Ratio 7.0 Receivable Days 0 Inventory Days Payable Days Current Assets / Current Liabilities (Current Assets - Inventory) / Current Liabilities) 180/(Total Revenues / Accounts Receivable) 5 180/(Cost of Goods Sold / Inventory) 44 180/(Cost of Goods Sold / Accounts Payable) Due to zero sales on credit and very high profit margin, Peyton business is a surplus cash generating business and hence very high current ratio giving very high comfort in terms of its liquidity position. Very high quick ratio in absence of debtors also represents the very high level of cash available with the company which can be deployed in very aggressive growth. Receivable days are zero because of zero sales on credit This tells us that on average, Peyton is maintaining only 5 days worth of inventory and which is also a very good indicator of high demand of Peyton's product and its fast movement and hence lower requirement of working capital which is also reflected from lower debt Payable days at 44 days reflects that on an average Peyton is paying its suppliers in interval of every 44 days which is also tells us about Peyton's ability to source its supplies at very favorable credit terms 1 Working Capital Cycle Days -39 Receivable Days + Inventory Days - Payable Days Negative working capital cycle tells Peyton's ability to run its operations successfully and profitably at very favorable terms with its suppliers and on other hand keeping a good inventory management system which enables it to maintain inventory at lower levels. Turnover Inventory Turnover Ratio 38 Debtors Turnover Ratio 0 Accounts Payable Turnover Ratio Gross Asset Turnover Ratio Net Asset Turnover Ratio 4 Such high ratio indicates the demand for Peyton's Cost of Goods product as it is able to replenish its inventory on an Sold / Inventory average 38 times in 2014 that too in span of just six times Total This is zero because of zero credit sales Revenues / Accounts Receivable Keeping this ratio at lowest tells Peyton's ability to Cost of Goods negotiate better terms with suppliers in a way that it Sold / Accounts has to pay its suppliers only 4 times in six months Payable 26.0 Total Revenues / Gross Assets 28.6 Total Revenues / Net Assets Gross Turnover at 26 times and Net Asset Turnover at 28.6 times indicates Peyton's ability to utilize its assets very efficient and at the same times depicts the less capital intensive nature of business or in other word Peyton is generating 26 times more sales than the cost of its assets that too in span of only six months. Return Ratios Return on Assets 65.2% Return on 85.6% Equity Return on Capital 75.7% Employed Financial Ratios PAT / Total Assets PAT / Total Equity EBIT / (Total Equity + Total Loan) Peyton's higher net margin and less capital intensive nature of the business has enable to generate 65.2% return on its total assets in a span of only six months. Higher net profit has also enable Peyton to generate 85.6% return for its shareholders. Driven by lower debt and higher profitability, Peyton has generated 75.7% return for all its stakeholders including loan provider. This ratio indicates the proportion of debt lies in the overall capital structure of the business and in case of Peyton's it is only 14%. This ratio tells about firm's ability to repay the Interest interest obligation on the money borrowed out firm's EBIT / Interest Coverage 209.19 operational profit for the period. At 209.19, it Expense Ratio indicates that Peyton's profitability has ability to pay its interest obligation 209.19 times. Note: Ratio are based on first six months performance and are not annualized Debt-Equity Ratio 0.14 Total Loan / Total Equity 2 Ratio information is useful as it helps to analyze trends of the business. Based on one can make decision to expand or compress. Also ratios helps to understand pain point in the business in terms of efficient utilization of assets, requirement to curtail certain costs in order to improve margins and hence profitability, also one can take a call to manage its working capital requirement more efficiently. Ratios as in case of Peyton, also tells the business is running on heavy surplus cash which can be deployed in more efficient utilization and hence improve profitability and return on investments. 3 Part 2 Bank Memo To: The Bank Manager From: Managing Director / CFO of Peyton Approved (Type Your Name) Date: June 27, 2015 Subject: Overview of Peyton Approved's accounting system, practices followed and financial position of first six months of operation to open a line of credit or Term loan (Write the purpose of memo) Dear Sir / Madam, Peyton Approved runs a dog treat bakery which makes and sell all-natural and hypoallergenic products. We have been able to make great strides in the business in first six months of our operations and believe to grow even far more aggressively in the years ahead and report even higher profits. During the period Peyton reported sales of $130,112 and profits of $62,458 with a net margin of 48.0%. We take the pleasure of presenting to you the overview of Peyton's accounting system, process, key business strategies, results of operations of first six months, Peyton's strength and weakness and its financial position. Also in the subsequent section you will find snippets on Peyton's strategy to overcome its prevailing weakness and future strategies: (a) Overview of Peyton Approved accounting system and basis of accounting Peyton follows double-entry accounting system where every transaction affects at least two accounts in a manner that one account will get and the other will get credit. For instance, sales made by the company debit the cash account increasing the cash balance and subsequently it also credit the sales account thereby increasing credit balance of sales 4 account. The advantage of following this type of accounting system is that at any given time, the balance of Peyton's asset accounts will equal the balance of its' liabilities account. In addition to this, Peyton also follows accrual basis of accounting which means that receipts and expenses are recorded as and when they are incurred and not when they are actually received or incurred. At Peyton, it is believed that by following accrual system of accounting, the Company's profitability, assets, liabilities and other financial information will match the economic reality. (b) Strategies being followed to ensure responsible accounting practices It is core principle of Peyton Approved to follow responsible accounting practices to avoid any leakages of expense as well as receipts and also enables to follow good governance practice and work towards welfare of every stakeholder including its customers, internal employees as well as external borrowing partners. Peyton review its financials on a monthly basis and match the same against its budget in order to perform a detailed variance analysis. Subsequent decisions are made in order to capture variances in the performance of months ahead. Call is also taken to revise the budget upward or downward depending upon the monthly review reports. Peyton follows FIFO method of inventory valuation. This is because over last six months, Peyton has been sourcing its supplies for bakery at price which is showing declining trend and hence Peyton is relinquishing its stock on FIFO basis wherein the stocks bought first are sold in order to maintain stock of inventories which came at lower cost. Peyton believes in sharing the results from even smaller success with shareholders and hence in lieu of high profit making business, Peyton rewards its shareholders monthafter-month with its dividend payout decision which it pays from its every month profit. Peyton also believes and follow in practice of paying its employees, suppliers and borrowing partner in timely manner and has never defaulted on any payment obligation. 5 (c) Describe the overall accounting process. For example, when are entries made, how often are statements produced and reviewed, and why? Describe the internal controls for cash that are in place. Every transaction (whether or not involves cash transaction) is first record in an event register which is maintained in a chronological order. Once recorded here, any such event which involve financial transaction (cash or credit) gets recorded in a Book of Journals in chronological order with detailed narration. From Journals, adjusting entries are prepared and recorded separately. Post this Team prepares two different sets of Trial Balance - prior to adjustment entries and post adjustment entries. From trial balance, the balance sheet and income sheet are prepared. Finally Peyton ends the reporting period by closing its books by passing the closing entries and preparing and maintaining the postclosing unadjusted trial balance. T accounts for each account are maintained with date wise entries from relevant journal. Financial statements are produced and reviewed on a monthly basis in order to evaluate individual monthly performance against their target and overall company performance against budget. At Peyton Approved, internal control practices are followed in true spirit to promote efficiency, safeguard assets and deter and detect errors, fraud and theft. The control at Peyton begins at management level showcasing the adoption of culture of integrity and ethical values thereby preventing mishandling of funds and safeguarding against loss both financial as well as non-financial. For the purpose of putting control on cash receipts and expense: A separate employee other than book-keeper is kept to open the mail and list all the cash receipts and expense All payments are made only by way of \"deposit only\" checks with proper company stamp 6 In case of sales, payments are received only through electronic mode where customers are required to pay either through credit or debit card. Separate accounts are maintained for receipts and payments. Petty cash at the store are maintained with a proper lock box with one employee appointed as a primary custodian of the cash balance. Two separate bank reconciliations are prepared - one by the book keeper and other by the separate employee who opens the mail list all receipts and payments. Review of bank reconciliations is done on a monthly basis and variances in both statements are noted and differences are explained to the Accounts Head who highlight the same in the monthly management report. (d) Analyze the results of operations. What do these results tell a business? Peyton reported $130,112 sales in first six months of operations. We opened the doors of our bakery on July 16 and closed that month with $5,000 and in December we closed the month with $30,000. During this period sales grew at 38.5% month-aftermonth. Cost of goods sold for Peyton is 38.3% of sales thereby resulting in a gross margin of 61.7%. Higher gross margin and faster growth in sales also enables Peyton to report higher operating margin of 48.2% and because of lower debt in the business (debtto-equity ratio is only 0.14 times) the net margin is also very high which is at 48.0% of sales. Peyton sales 100% of its manufactured products in cash and hence there are no debtors in the business eradicating the risk of bad debts. In addition, the demands for our products are very high because of all-natural and hypo-allergenic nature which enables faster movement of inventory and hence the same is reflected by very high inventory turnover ratio of 38. This translates into maintenance of only 5 days of inventory thereby showcasing the highly efficient inventory management system in place. So far Peyton 7 never ran out of stock to meet customers demand and we will thrive to maintain the run rate. On the other hand, Peyton in these six months has earned very high potential to negotiate terms with its suppliers which are favorable to its business and has succeeded in paying its suppliers after a lag of average 44 days from the date of purchase. Lower inventory days and higher payable days has enabled the company to run on negative working capital thereby eliminating the risk of blocking its funds in working capital. Peyton Approved has also due to zero sales on credit and very high profit margin has been to generate very high surplus cash and combining this with lower accounts payable and notes payable has achieved very high current ratio at 7.1 and very high quick ratio at 7.0 as well due to lower inventory levels giving very high comfort in terms of its liquidity position. This enables the company to maintain very high cash which can be deployed for aggressive expansion in both organic and inorganic manner. Less capital intensive nature of the business, efficient utilization of assets and higher sales have enabled Peyton to achieve a very high asset turnover ratio (gross asset turnover ratio at 26.0 and net asset turnover at 28.6). This when combined with high profit margins have enabled the Company to report very high return on assets at 65.2%, return on equity at 85.6% and return on capital employed at 75.7%. (e) What do the statements themselves tell about the strengths and weaknesses of the company's financial position? What does the ratio analysis tell someone about the strengths and weaknesses in the company's financial position? Income statement tells about the Company's profitability position in comparison to sales and costs incurred to achieve those sales during a particular accounting cycle which in case of Peyton Approved is showcased for the year ending December 31, 2014 (only for last six months). 8 Balance Sheet tells the position of assets and liabilities of the Company as on particular date (for Peyton it is December 31, 2014) which it requires to maintain to conduct its operations Ratio information is useful as it helps to analyze trends of the business. Ratios helps to understand pain point in the business in terms of efficient utilization of assets, requirement to curtail certain costs in order to improve margins and hence profitability, also one can take a call to manage its working capital requirement more efficiently. Ratios, as in case of Peyton, also explain that the business is running on heavy surplus cash which can be deployed in more efficient utilization and hence improve profitability and return on investments. Based on trend in ratios one can make decision to expand or compress. (f) Discuss the changes in operations that might need to be made to make the company more profitable. Justify why each change may be necessary. Peyton sell its product on 100% cash payment. Selectively the Company can also start selling on credit by keeping strict and proper checks and balances on its customer credit profile. Doing this the company can earn higher sales and hence higher profitability. Surplus cash generated in the business should be invested in liquid assets yielding risk-free return which will be further boosts net profits. (g) & (h) What are the company's financial strengths and weaknesses? What specific changes can be made to alleviate the weaknesses? What opportunities can the company explore because of its strengths? How would these be beneficial? Performance in first six months of operations reveals the pull effect of the products being manufactured and sold by Peyton and also the Company has shown its potential to generate significant profits maintaining very high margins. However, given its operations are limited to only one store the growth and profitability are restricted and hence to overcome this Peyton should consider aggressive 9 expansion plan. For this it has to open multiple stores and increase the penetration. This will also improve the utilization of current surplus cash present in the balance sheet. Besides, given lower debt-equity ratio, strong product pull and high operating margin in the business Peyton should also take the advantage of leverage effect by increasing its borrowing to expedite the expansion plan. Doing this and based on results of existing store, Peyton profits can be multiplied significantly. Consideration to expansion into other markets should also not be ignored given the product and its profit potential. The move will not only improve Peyton's financial but it also will enable Peyton to enhance its brand value and consumer acceptance and reach different market. Please write the conclusion of your own as I do not know the purpose of Bank Memo. If it is for fund raising / borrowing then mention that based on Peyton's past six months performance, our best internal practices to ensure good governance practices and our outlook on the future we request you to forward our proposal to your Bank and release $XXXXX line of credit or $XXXXX term loan for a period of 5 years with 1-year moratorium. Thanking You. Yours sincerely Signature Your Name 10