DIPLOMA IN BUSINESS & ENTERPRISE MANAGEMENT (L7)
ABD 501- Financial Analysis for Managers
(V1) (15 CREDITS, L5)
ASSESSMENT 2: ASSIGNMENT/REPORT
DUE: 29th September, 2019
The 501 assessments cover:
Outcome Weightage Total Marks: 200 Pass marks: 100
Assignment 1-Test (6 credits) 1, 3 40% 80 40
Report (9 credits) 2,4,5 60% 120 60
A final overall grade pass mark of 50% with a minimum pass mark of 50% in each assessment is required.
PTO for the instructions.
Diploma in Business & Enterprise Management (L7) Assignment/Report, Financial Analysis
1 Your report is to be word processed using appropriate sections, page numbering, indentations, style (e.g. Arial or Times New Roman) and size (font 12, line spacing 1.5).
2 Your report is to be submitted electronically via www.abacusinstitute.ac.nz/moodle by 11:59pm on the due date above.
3 The presentation of your work must use appropriate tone, register, vocabulary (including non-sexist language), grammar and syntax.
4 You must cite all referenced material using the American Psychological Association (APA 6th) style.
5 Maximum word limit 6000 words (+/- 10% as a guide)
Alternative arrangements can be made for presenting and submitting your work with help of the course instructor/tutor, in case of any special needs.
Diploma in Business & Enterprise Management (L7) Assignment/Report, Financial Analysis
OVERVIEW OF LOs
ABD 501 requires you to demonstrate and apply knowledge of financial analysis. In order to be credited with this unit standard you will be able to:
• Examine the key principles of accounting and financial analysis including the objectives and limitations of analysis to assess financial performance of an organisation. (LO1)
• Analyse and Interpret the financial statements including Income statement, balance sheet and cashflow statement of an organisation in New Zealand. (LO2)
• Apply the financial analysis techniques to assess profitability, asset utilisation, working capital management, long-term financial stability, and financial markets for an organisation. (LO3)
• Examine and apply the solvency test and related legislation for and organisation in New Zealand. (LO4)
• Plan and prepare financial analysis report for an organisation applying ethics, professionalism and industry norms. (LO5)
Your performance in these assignments will be assessed in a classroom context. This will be a realistic simulation equivalent to that of a workplace context. LO1 and LO3 are being assessed in Closed Book Exam and LO2, LO4 and LO5 are being assessed in the Assignment.
***The assessment and related instructions for you to follow start from the next page***
YOU ARE REQUIRED TO PLAN AND PRODUCE A FINANCIAL ANALYSIS REPORT IN THE FOLLOWING CONTEXT:
CONTEXT / BACKGROUND
FMG Motorcycles (henceforth FMG) is a New Zealand company that was established in 2014 to supply customers with quality motorcycles and scooters. FMG has been going from strength to strength since its establishment.
FMG is not just about selling motorcycles, they have an excellent parts and accessories department, where you can also find all the latest clothes and accessories. It is a fast-growing company in terms of sales and in assets and is looking to continue this growth. The directors of FMG are planning to buy the computerized diagnostic machine and replace the portable diagnostic tools to sustain the growth and be relevant with increased competition. Most of FMG’s sales are cash sales. Whereas, most of their purchases are on credit.
FMG has employed you to prepare a formal business report which should present a detailed financial analysis to the directors of FMG, to assess the prospects of raising a bank loan or shares issue, in order to sustain the growth at FMG. FMG has supplied you with financial information, which you have analysed already in assessment 1 (test). The financial statements along with the ratio calculations are provided for you on pages 13-15.
You must ensure that your report and its format are consistent with its purpose, and must be in accordance with the following organisational requirements of FMG:
Policies and procedures (Business Reporting Confidentiality) Policies:
1. All business reporting pertaining to the company’s internal matters and/or management decision-making must be strictly confidential.
2. Such reporting must only be made available to the company’s management and board of directors.
Reports submitted to the company’s management and/or board of directors should have a “Confidential” watermark throughout the document and rendered to the .pdf format if distributed electronically.
Ethical, professional & legal requirements:
Report must be written, taking account of ethical and professional requirements including legislation which includes Companies Act 1993 and/or others.
Planning and WRITING YOUR REPORT
Your report structure must:
1. Include a statement of service which addresses the fundamental principles of NZICA code of practice (which must include: integrity, objectivity, professional competence and due care, professional behaviour and confidentiality) and address members requirements in business (which may include but not limited to: Preparation and presentation of information , Acting with sufficient expertise, Financial interests/compensation and incentives linked to financial reporting and decision making) (Total 8 marks) (LO5)
2. Include an Executive summary (maximum 300 words) which clearly and accurately reflects the overall purpose/ scope of the report together with the major findings as drawn from the analysis and the recommendations made. (total 6 marks) (LO5)
3. Include an accurate table of contents. (2 marks) (LO5)
4. Write an introduction which includes planning of the report which must provide:
The Nature/background of organisation and purpose of the report (2 mark)
(e.g., what problem(s)/issues(s) you are addressing in your report).
The audience for the report (1 mark)
(e.g., for whom you are preparing this report (its intended readers) together with their priorities and/or needs).
The scope of the report (5 marks)
(e.g., what is the extent of your investigation (ie., period covered for analysis, financial statements covered and/or excluded, specify the ratios that have been selected for analysis and/or excluded) methodology (ie., financial analysis techniques that have been used)
5. Include Interpretation, Analysis and solvency test (60 and 18 marks respectively) (LO2) 6. Include Conclusion (Total 4 marks) (LO2 and LO5)
What conclusions can be drawn from your financial analysis? Which source of finance is suitable, given the findings of the financial analysis?
7. Include Recommendations (Total 6 marks) (LO2 and LO5)
In the light of your financial analysis and conclusions, make at least 3 recommendations for improvements, and for making FMG’s prospects better for raising finance. (NB: These suggestions should be practical, specific, consistent with your findings and explained in reasonable detail).
8. Be written professionally (4 marks) (LO5)
- is written in language appropriate for management (e.g., spelling, punctuation, vocabulary and grammar).
- be consistent with its purpose and organisational requirements.
- Be written without bias present findings using an appropriate format which matches the data as per the stated context. (e.g. may include /graphs /tables /text/ diagrams).
N.B(4 marks will be rewarded for appropriate formatting and other organisational requirements)
1.Interpretation and Analysis: (5 marks per ratio analysis x 12 = total 60 marks)
By interpreting the information from the Statement of financial performance, Statement of financial position and Statement of cashflows (provided on Pg # 10-12), Analyse the financial ratios under given categories.
1.1) Profitability (x3)
1.2) Working capital management (x3)
1.3) Long term financial stability (x2)
1.4) Asset utilisation (x2)
1.5) Market value ratios (x2)
NB: Your analysis must include a discussion of:
§ A definition and/or explanation of each ratio (1 mark)
§ A comparison between the 2017 and 2018 financial years stating the results as being either favourable or unfavourable (1 mark)
§ A comparison with industry benchmarks (provided on Pg#13).
§ Reason(s) for the changes from 2017 to 2018, using horizontal analysis where necessary. (1 mark)
§ Impact on stakeholder(s) (1 mark)
§ Any other relevant information (optional)
2. Solvency test (Total 18 marks)
The directors of FMG. have paid a dividend of $650,000 to shareholders for the year ended 30 June 2018, which has been adjusted in financial statements.
Since balance day there is a further transaction due for attention. One of FMG’s suppliers obtained a long-term bank loan worth $3,000,000 few years back. FMG had agreed to guarantee that the supplier's bank loan will be repaid. As a result of the company's guarantee, the bank made the loan to the supplier. Now it is confirmed, that the supplier will not be able to pay the 40% of the loan due to be paid in next 6 months, due to severe cashflow problems. FMG’s directors had not adjusted the financial statements for contingent liability at the time of providing the guarantee. However, directors had disclosed the contingent liability as probability of supplier’s inability to pay the loan was assesses as very low.
2.1) Whether the FMG’s directors are required to perform solvency test according to Companies Act 1993 (4 marks).
2.2) If so, apply the two limbs in accordance with the solvency test, analyse briefly and draw a conclusion, of whether the decision for the payment of dividend was appropriate. (10 marks)
2.3) What considerations FMG’s directors must have for financial statements and solvency certificate in regard to solvency test? (4 marks)
Before submitting your report, you are expected to have carefully edited and proof-read the entire document before it can be considered for assessment.
FMG Motorcycles’s Financial statements and additional useful information is given as follows.
Statement of Financial Performa for Year Ended 30 June 2018 nce
Sales 11,000,000 10,000,000
Cost of sales
Gross profit 5,760,000 5,500,000
Warehouse rent 250,000 180,000
Heating and lighting 185,000 150,000
Administration 165,000 130,000
Repairs and maintenance 180,000 145,000
Depreciation 290,000 350,000
Earnings before interest and tax 615,000 460,000
Interest 500,000 750,000
Net profit 1,219,400 889,000
Statement of Financial Positio As at June 30, 2018 n
Equity 9,385,600 8,400,000
represented by Current Assets
Short term investments 2,064,400 2,100,000
Accounts receivable 60,000 50,000
Inventory 2,700,000 3,000,000
Prepaid expenses 0 0
Total Current Assets 8,688,800 7,885,600
Land & Building
Total Non-current Assets 3,200,000 4,000,000
Taxes payable 480,000 300,000
Accrued expenses 500,000 800,000
Accounts payable 1,658,800 950,000
Other liabilities 564,400 0
Total Current Liabilities 4,103,200 2,985,600
Long term loan
Total Non-current Liabilities
Statement of Cashflows
For Year Ended 30 June 2018
Cashflow from Operating activities Cash received from customers
Cash paid to suppliers (4,751,200)
Interest paid (535,600)
Tax paid (1,065,000)
Other payments (administration, wages, marketing) (1,895,000)
Cash generated from Operating activities 2,743,200
Cashflow from Investing activities
Proceeds from sale of long-term assets
Proceeds from sale of part of unused Land 500,000
Cash generated from Investing activities 1,500,000
Cashflow from Financing activities Dividends paid
Loan paid (2,500,000)
Cash used in Financing activities (3,150,000)
Net cash flow generated 1,093,200
Cash and cash equivalents at the beginning 4,835,600
Cash and cash equivalents at the end 5,928,800
Additional information: 2018 2017
Issued Shares 200,000 200,000
Dividends paid 650,000 500,000
Market value per share 75 45
Cash sales 9,500,000 9,000,000
Credit sales 1,500,000 1,000,000
Total Sales 11,000,000 10,000,000
Inventory, accounts receivable and accounts payable have been carried forward as $2500,000, $40,000, $900,000 respectively at 1 July 2016.
Industry averages of Retail Motorcycle Industry.
Indicator Industry Benchmark
Profitability Gross profit margin % 38%
Return on Equity % 15%
Net profit margin % 5%
Working capital management Current ratio x:y 2:1
Quick ratio x:y 1:1
Cashflow margin % 35%
Financial stability Debt to Assets (%) 50%
Debt to Equity ratio x:y 1:1
Interest cover (times) 5 times
Asset utilization Inventory turnover
(times) 5 times
AR turnover (times) 25 times
AP turnover (times) 8 times
Market Value Earnings Per Share $6/share
Dividends payout ratio 30%
P/E ratio 15 times
Industry averages Adapted from: https://shinyapps.stats.govt.nz/bpb/
*some of the averages have been changed according to generic standards of ratios for conceptual understanding of the course taught at level 5.
Summary Chart: Ratio and Percentage Calculations from Test:
Name of Ratio Ratio analysis
Profitability Ratios (x3)
1) Gross profit margin (%)
2) Net profit margin (%)
3) Return on Equity (%)
Net profit/equity*100 15.19% 17.42%
Asset Utilization Ratios (x2)
1) Inventory turnover (times)
Cost of goods sold/Average inventory
2) Account receivable turnover
Credit sales/Average AR
3) Accounts payable turnover
Cost of sales/Average AP
Financial Market Ratios (x2)
1) Earnings per share ($/share)
Net profit/No. of shares $6.38/share $8.18/share
2) Dividend pay-out ratio (%)
Dividends/Net profit*100 39.18% 39.74%
3) P/E ratio
Market price per share/EPS 7.05 times 9.17times
Financial Stability Ratios (x2)
1) Debt to assets ratio (%)
Total liabilities/total assets*100 55.52% 49.24%
2) Debt to equity ratio (X: Y)
Total liabilities/Equity 1.25:1 0.97:1
3) Interest cover (times)
Earnings before interest and tax/
Working capital Ratios (x3)
1) Current ratio (X: Y)
Current Assets/Current liabilities 2.64:1 2.12:1
2) Quick ratio (X: Y)
3) (Current Assets-inventory)/ Current liabilities 1.64:1 1.46:1
4) Cashflow Margin (%)
5) Cash flows from operating activities/Net sales*100
STUDENT FEEDBACK REPORT
ABD 501 Financial analysis for Managers
Allocated Overall result A/NA