Profitability Ratios

Discuss About The Operations Management Oxford University?

This is a comprehensive survey of the trading activities conducted by effective distributors limited whose directors are concerned with the company’s operations and hence have asked for a comprehensive report for the company. From the income statement for the year 2016 we shall analyze all the important ratios for the company to evaluate and comment on which aspect of the company it needs to improve on(Hodge, 2008).

These are ratios that assesses the ability of the company to generate earnings compared to the relevant costs and expenses that it incurred during a specific period. Having a higher ratio relative to the same ratio from the past period indicates that the company is doing well.

This is the amount of net income returned as a percentage of shareholders equity. It measures company’s profit generated from the shareholders equity. Return on equity is calculated as follow:

This ratio measures the efficiency of the company’s assets to produce profits. Therefore, if the company is management its assets effectively to produce profits during the period(Horngren, 2014). The ratio is calculated as follows.

R.O.A=Net income/ Average total Assets

The two ratios return on Equity and Return on Assets have decreased from 2015 to 2016  as follows For R.OE 7.6%.in 2015 to 2.4% in 2016.  For the return on Asset ratio, there is also a decreased from 3.9% to 1.2%.

This ratio measures the percentage of net income of an entity to its sales. The formula for this is net income/ net sales(Montana and Charnov, 2000).

The sales of the company have decreased from 180000 to 165000 as the nerd income also decreases in the two years.

This is calculated by subtracting expenses from revenue to get profit which is then divided by the sales.

the selling ratio has decreased from 2015 to 2016. From the analysis of these ratios the company is on downward trend as the sales have decreased by 15,000. Also, the gross profit decreased from 2015 to 2016.

The current ratio of the company is healthy, this means that it can meet its current obligations without any problem. Actually, the ratio for the yaer 2016 has surpassed the ideal current ratio that is set by accounting standards which is 2:1.  But, this also shows that the company is keeping too much of its assets in form of short term assets instead of investing in the company.

Return on Equity(ROE)

The company quick ratio is showing that the company has been managed well, this ratio is usually set at 1:1 which is ideal for any company as set by the international accounting bodies.

Inventory turnover ratio shows how the company manages its inventory. It measures how many times an inventory has been turned.

Reduce costs. The management should look into the company’s  spending  to see which ones they can cut. For example, if the rent is very expensive,they can try to negotiate staggered payments with the landlord, or a discount this year in exchange for paying a little more per square meter in subsequent years. If the shipments are too expensive, they should  call other suppliers to see who offers  the most competitive cost plan(Scarborough, 2014).

Find new customers. This does not have to be expensive. Currently, everyone resorts to Google to find the services they need. We can hire a pay-per-click advertising program. Manage the inventory in a more effective manner by buying the raw materials that will be used. The company’s bottom-line has reduced drastically in the last three years which means that the expenses will have to be reduced. It should also carry out an aggressive marketing campaign to aid in improving the company’s sales(Williams, n.d.).

The ethical issue in this case is financial statement misrepresentation to paint Allandale Ltd in good light. The problem is that if Tom Lyons the accountant correctly posts the figures of the unsold boat and increases the provision for doubtful debt, then the company’s current ratio would fall to 1.6:1 and the return on assets would fall to 2%. This would force the company to pay a $20million mortgage loan which would render it bankrupt. Thus, the problem in this case is misrepresentation to avoid paying of the loan.   Fraud is another ethical issue , which is a deliberate act that can result to financial harm.  Fraud is a criminal act and when there is proof that one of the parties suffered financially.

The stakeholders are the employees of Allendale ltd because they will lose their jobs if the company goes ahead to repay the loans. The other stakeholder is the bank that extended a $20 million loan to Allendale Ltd. This company will be directly affected by inability of Allendale ltd to pay up the loan.

The following are the principles and values that should guide an accountant in his/ her profession. An accountant like Tom Lyons should perform his duties guided by the highest sense of integrity.  Accountants should not misrepresent the company by sticking phony numbers in the balance sheet.  Any form of Misstatements by omission or ignoring obtainable information while carrying out their duties is wrong in this profession(McGee and Preobraz?enskaa?, 2005).  Thus, Tom Lyon is expected to prepare the company’s financial statements using the correct figures and without leaving out any information that would  mislead the stakeholders of the company. The other guiding principle that should be used by the accountant is the objectivity principle.  The objectivity principle states that all measures and figures used in accounting should be verifiable, objective and true.

Return on Assets(ROA)

The effects on the financial statements arising from the existence of accounting fraud, they do not reflect the economic reality of the company, thus violating the basic accounting principles governing

both the conduct of the accountant, and his work and product. Different users of accounting information are affected directly with fraudulent financial statements, since the decisions that they take tend to be wrong since the base information is not real and therefore they can suffer effects in the decisions of investment, financing and others(Stice, Stice and Diamond, 2006). Frauds that directly affect the financial statements are focused on in the overvaluation and undervaluation of revenues, costs and expenses, inadequate increases or decreases in balance sheet accounts, incorrect disclosure and inadequate application of the principles of accounting.

If the accountant goes ahead and manipulates the financial statement then one of the stakeholders suffers due to the manipulation, then it is only right to bring action against those responsible in this case , Tom Lyon the accountant  is the one who should be sued. It is important to collect enough evidence  to show that the manipulation of the financial statements happened. Tom should accurately represent the company by disclosing the true and fair value of  an assets that includes the boat and also disclose the true figure of the doubtful debt. Then proceed to talk to the bank to see if they can be allowed some more time to repay the loan(Schaltegger, Bennett and Burritt, 2006).

There is no economic activity outside the registry and involvement of the techniques of accounting science. From the smallest economic activity to the economic transactions of large corporations, accounting science contributes to a great deal of knowledge, which requires them to be applied by highly trained public accounting professionals. Giggling brothers is no exception(Peltonen, n.d.)..

Computerized Accounting system  is a system adapted to classify the economic facts that occur in a business. In such a way, it becomes the central axis to carry out various procedures that will lead to the obtaining of the maximum economic return that implies to constitute a determined company. Therefore, if Giggling brothers uses this system it will have more accurate figures and projections for all departments(Jones and Robinson, 2012)..

Today, computerised accounting system are present in all areas of organizations. This generalized implementation of IS has been carried out in many cases without the necessary planning, partly because the necessary concepts are not sufficiently developed. The trend towards open systems, global interconnection and consumers’ desire to become independent from manufacturers bring with them the need for a deeper study of IS before decision-making. Therefore, it is necessary to improve the planning of future implementations, the compatibility between systems and the organization of personnel and the company(Gaither and Gaither, 2004).

Net Margin Ratio

In recent years, the exercise of audit and control activities in information technology has supported a more than accelerated development of all other activities in the economy of a country. This leads one to think that the tasks performed by them must be equally audited.

In modern organizations, like Giggling brothers, the mission of computerized accounting system is to facilitate the achievement of its strategic objectives. To this end, a considerable amount of resources are invested in personnel, equipment and technology, in addition to the costs derived from the possible structural organization that often entails the introduction of these technologies. This important investment must be constantly justified in terms of efficiency and effectiveness(Greasley, 2008).. Therefore, the purpose to be achieved by an organization that contracts the audit of any part of its IS is to ensure that its strategic objectives are the same as those of the organization itself and that the systems provide adequate support to the achievement of these objectives, both in the present and in its future evolution.

At present, both processes and systems have been automated within which accounting information is integrated, ordered and presented to all departments. This integration is done globally within the company, in this system are fed different factors such as production, storage inventories, etc. Which provide accounting information necessary not only to make necessary decisions, but also for the daily operation of the company(Greasley, 2008)..

Thus, the present work contains an introductory vision about the automation of accounting processes, as well as their process, objectives, importance, among other aspects related to the topic discussed.

Computer science provides counter support for job performance through Software, such as EXCEL, ACCES, and Accounting Packages, which allow simplification and speed of work. The following are some of the reasons why the company’s management  should consider implementation of computerized accounting and reporting system(Gaither and Gaither, 2004).

 1- Computerized accounting is faster, because through the creation of software or programs created in the computer can perform tasks previously only achievable by an accountant.

2-A greater volume of operations can be handled and the number of errors is greatly reduced because instantaneous tasks are carried out that consume a lot when done manually.

3-The calculations made by the machines are more reliable than those made by the people. So we get more integrated and reliable information.

4-The use of the computer ensures each seat with accuracy, avoiding mistakes like the double pass, the pass to a at the wrong account, settle a credit as a debit or vice versa.

Selling Ratio

5-Computerized reports are automatically produced by a system of accounting among the most important: diaries, majors, financial statements and special reports that help to make accurate decisions of the company(Gaither and Gaither, 2004).

. 6-By means of computerized accounting the work of the accountant is merely intellectual, since this only has to make sure that the configuration and entries of a transaction are connected, the system will be in charge to do the rest of the work

. 7-Computerised accounting system operate as an engine of change that allows responding to the new needs of information

.8-An accounting program today allows virtual closing of accounting by pressing a key, so it is very important for accountants to know the state of information technology at any time

.9-Using a computer medium supposes greater speed to obtain the balances or the possibility of depositing the accounts in the commercial registers or liquidating the taxes through procedures of electronic exchange of information(Armstrong, 2014)..

 10-Automatic document printing. A computerized system provides much of the documents used in a business. In conclusion, IT allows significant time savings to the Accountant, because the Accountant no longer has to classify or record data (these activities became repetitive and routine), which ultimately do not constitute final functions of accounting. The development and systematization of accounting has freed the Accountant of this phase of the process, which allows him to take care of other things like the analysis and interpretation of the information provided by the software(Epstein and Lee, 2010).. Nowadays the Accountant is not cataloged as the person who only counts figures, today the Accountant is someone different, and thanks to the technological advance, this one plays a very important role within the organization as interpreter of the figures that offer the accounting packages and other systems.

References

Armstrong, M. (2014). Armstrong’s handbook of management. London: Kogan Page.

Brennan, L. (2011). Operations management. New York: McGraw-Hill.

Epstein, M. and Lee, J. (2010). Advances in Management Accounting, 18. Bradford: Emerald Group Publishing.

Gaither, N. and Gaither, N. (2004). Operations management. Australia: Cengage.

Greasley, A. (2008). Operations management. Los Angeles: SAGE.

Hodge, B. (2008). Accounting. London: Thomson Learning.

Horngren, C. (2014). Accounting. Toronto: Pearson Canada.

Jones, P. and Robinson, P. (2012). Operations management. Oxford: Oxford University Press.

McGee, R. and Preobraz?enskaa?, G. (2005). Accounting and financial system reform in a transition economy. New York: Springer.

Montana, P. and Charnov, B. (2000). Management. Hauppauge, N.Y: Barron’s.

Peltonen, T. (n.d.). Organization theory.

Scarborough, N. (2014). Effective small business management. Pearson.

Schaltegger, S., Bennett, M. and Burritt, R. (2006). Sustainability accounting and reporting. Dordrecht: Springer.

Slack, N., Brandon-Jones, A. and Johnston, R. (2017). Operations management. Cape Town: Pearson.

Stice, E., Stice, J. and Diamond, M. (2006). Financial accounting. Mason, OH: Thomson / South-Western.

Williams, C. (n.d.). Effective management.

Williams. (2015). Effective Management. Cengage Learning.