School of Accountancy 115.102 Accounting Assignment 2 Semester 1, 2016 Please note that this assignment is due before Monday 16 May 2016, 12 Noon (12.00 hours), New Zealand Time Assignment 2 will be marked out of 45 and will contribute 15% to your final grade. Assignment Brief Financial Statement Evaluation and Report Japheth Enterprises is a wholesale business based in Auckland, owned and operated by Ms Pauline Pune. The business deals mainly in giftware. Ms Pune recently received from her accountant the annual financial statements for Japheth Enterprises for the year ended 31 March 2016 and a copy of these are included in Appendix A. As a wholesaler, 80% of Japheth Enterprises sales are on credit. Comparative figures for 2015 and industry averages are also given in Appendix B. Ms Pune has some concerns about her business but has limited accounting knowledge and asks for your help in understanding what the financial statements reveal about the business. Ms Pune has particular concerns about the rapidly dropping bank balance and the ability of the business to pay its bills. She is also concerned about the increase in inventory. Required. You are required to prepare a report for Ms Pune as follows: a) Complete the ratio calculations for 2016 in Appendix B in the Excel file provided. Show your calculations on this sheet. Calculations should not appear in the body of the report. A list of analysis ratios for use with Cunningham is included in Appendix C (10 marks) b) Using the financial statements and relevant ratios from Appendix B, discuss the liquidity and short term debt paying ability of Japheth Enterprises, making sure you explain these concepts as well as giving your findings (8 marks) c) Identify and discuss at least three significant issues in relation to the management of inventory at Japheth Enterprises (12 marks) d) Make three recommendations you consider appropriate following on from your discussions in b) and c). (6 marks) Guidelines for writing reports are given in the Administration Guide under Assessment details/ Assignment Two. (9 marks will be allocated to presentation and referencing of your report). Detailed Assignment Instructions and Information follow after the Appendices. Appendix A: FINANCIAL STATEMENTS FOR JAPETH ENTERPRISES Japheth Enterprises Income Statement Year ended 31 March 2016 2016 2015 000 000 Sales (80% on credit) $8,400 $9,100 Cost of Goods Sold Opening inventory 1,226 1,144 Purchases 6,860 6,750 Less Purchases returns 630 550 Less Closing inventory 1,576 1,226 5,880 6,118 Gross profit 2,520 2,982 Overhead expenses Selling expenses 612 512 Administration expenses 973 1,041 Interest expenses 254 268 Total expenses 1,839 1,821 Net profit $681 $1,161 Japheth Enterprises Statement of Changes in Equity Year ended 31 March 2016 2016 2015 000 000 Opening balance $7,952 $7,391 Add Capital introduced 0 0 Add Net profit 681 1,161 Less Drawings 600 600 Closing balance $8,033 $7,952 Japheth Enterprises Balance Sheet As at 31 March 2016 2016 2015 000 000 Owners Equity $8,033 $7,952 Current assets Bank 71 234 Marketable Securities 242 266 Accounts receivable 875 1,188 Inventory 1,576 1,226 Prepaid expenses 112 114 Total current assets 2876 3,028 Current liabilities Accounts payable 1,544 1,146 Accrued expenses 177 145 Total current liabilities 1,721 1,291 Working capital 1,155 1,737 Non-current assets Equipment 2,896 3,334 Buildings 4,842 4,332 Land 1,000 1,000 8,738 8,666 Non-current liabilities Term Loan 1,860 2,451 Net assets $8,033 $7,952 Appendix B Financial Ratios for Japheth Enterprises 2016 2015 Industry (only some available) Marks 1 Profit Margin 12.76% .5 2 Gross Profit Percentage 32.77% 35% .5 3 Return on Total Assets 12.21% 1 4 Rate of Return on Owners Equity 15.13% 15% 1 5 Inventory turnover 5.16x 1 6 Number of days in selling period 71 days 55 days .5 7 Accounts Receivable turnover 6.35x 1 8 Number of days in collection period 58 days 50 days .5 9 Current Ratio 2.35 1.5 1 10 Quick Ratio 1.31 1.1 1 11 Debt ratio 32% .5 12 Interest coverage 5.33x .5 13 Sales % increase 12.07% 1 (10 marks) Appendix C ANALYSIS RATIOS FOR USE WITH CUNNINGHAM TYPE OF RATIO REFERENCE PROFITABILITY Chapter/ Page 1 Profit Margin Ch. 7 p.293 (280) Net Income x 100 Net Sales 2 Gross Profit Percentage Ch. 7 p.293 (281) Gross Profit x 100 Net Sales 3 Return on Total Assets Ch.8 p.343 (323) (Net Income + Interest Expense) x 100 Average Total Assets 4 Return on Owners Equity Ch.8 p.324 (344) Net Income x 100 Average Owners Equity EFFICIENCY 5 Inventory Turnover Ch. 8 p.326 (345) Cost of Goods Sold Average Inventory 6 Number of Days in Selling Period Ch. 8 p.327 (346) 365 Inventory Turnover 7 Accounts Receivable Turnover Ch. 8 p.327 (347) Net Credit Sales Average Accounts Receivable 8 Number of Days in Collection Period Ch.8 p.328 (347) 365 Accounts Receivable Turnover LIQUIDITY 9 Current Ratio Ch. 8 p.337 (318) Current Assets Current Liabilities 10 Quick Ratio Ch.8 p.338 (318) Quick Assets Current Liabilities Where Quick Assets = Cash + Accounts Receivable + Short Term Marketable Securities + Short Term Notes Receivable FINANCIAL GEARING 11 Debt Ratio Ch. 8 p.339 (320) Total Liabilities x 100 Total Assets 12 Interest Coverage Not in text Net Income + Interest Expense Interest Expense OTHER 13 Sales % Increase Not in text (Sales Year 2 Sales Year 1) x 100 Sales Year 1 ASSIGNMENT TWO INSTRUCTIONS AND INFORMATION How to Approach this Assignment Please read the assignment brief and all instructions before starting the assignment. To complete the assignment you need access to a computer and a word processing package. You should first study the relevant material in the text and make sure you understand the concepts covered. Completion of the assignment Complete the report in a Word document file. Instructions for preparing a report are given in the Assessment Guide. http://stream.massey.ac.nz/mod/book/view.php?id=1608182&chapterid=479394 Complete Assignment 2 Appendix B excel file. When it is complete, copy and paste the Appendix into your word file, at the end of your report. To answer this assignment you should look beyond the set readings and text. Looking outside your text will enhance your answers and could earn extra marks. Please acknowledge all sources used. For information on referencing refer to the Massey University Online Writing and Learning Link: http://owll.massey.ac.nz Your report should range from 800 to 1,000 words. Appendix B and your references are not included in the word count. The marker reserves the right to decline to mark answers over 1,200 words. Assignment Queries Please feel free to keep in touch with the 115.102 team regarding this assignment, preferably through the forums. That way all students benefit and often we have found that the best way of learning is through discussion with your peers as well as teaching staff. Please note that this assignment is at individual, not group level. Discussion is fine but do not post your answers to the assignment on STREAM through discussion forums or other methods, as that will lead to penalties. If you are uncertain of how much you can share, please contact the teaching staff. Sharing answers can lead to penalties for all involved, not just the copier. There are a large number of students in this paper, but that does not mean that you are not each individually very important to us. We value each student and will try to provide appropriate guidance to the best of our ability. Naming Convention and Backups. Once you have started working on the assignment you should make backups. It pays to rename different versions of your work. A simple way to do this is to use the Save as file instruction and add a number or letter to the end of the file name. (This allows you to go back to an earlier version.) Use the following naming convention for the file that you are submitting: use your Last Name Student ID number as the name of the file [Do not change the file extension or you (and the marker) will not be able to use the file]. For example, if your Last Name is Smith and your Student ID number is 88888888, your file will be smith88888888.doc. Submission of the Assignment (Uploading your file to Stream) To access the submission points you must have completed the Honesty Declaration Quiz. The submission point for Assignment 2 is under Activities which are Assessed. a. In the Activities which are Assessed section on Stream click on Assignment 2 Submission Point. b. A box with Submission Draft and no files uploaded yet will appear with Upload a file at the bottom of the page. Click on Upload a file. c. Depending on your version of internet software you may be able to drag and drop the file from your computer to stream. If not, click on Add, then Upload the file, then click Browse, click on the file you wish to upload, then on Open, then on Upload this file. You will now see your uploaded file showing on the left side of the page. Only one file may be uploaded so remember to paste your appendix into the report d. Click Save changes. The submission is shown as Submission draft. e. When you are satisfied that the correct file has been uploaded, click on Send for Marking under the heading Final submission for assignment marking. The screen will then show the following message: Once the assignment is sent for marking, you will no longer be able to delete or attach file(s). Do you want to continue? You can then choose Cancel or Continue? f. Late submissions will be accepted by the system after the due date for a week only. For the purpose of determining if electronic assignments are handed in on time, STREAM records the submission date and time. See the Assessment Guide for policies re extensions and late submissions. Penalties will be applied to submissions received after the due date for which an extension has not been granted. Return of marked assignments You will not receive hard copies of your marked Assignment 2 back by post. Instead a marking sheet will be available at the same point where you uploaded your assignment. Note that the normal turnaround of assignments is three working weeks. However we will be working to return the assignment sooner than that. There will be feedback in the form of suggested solutions and overall comments by the marker. Marks will be awarded using the criteria in the 115102 Assignment 2 Marking Schedule included in the Material for Assignment 2 folder, together with this document. All the best with your assignment! The 115.102 Teaching Team