Discussion- Case Study: General Machinery, Ltd

Ratio analysis is a method used to analyze the financial reports of a company and interpret trends in the company's performance. As a nonaccounting manager, you use numerous ratios to analyze your company's performance year-by-year and benchmark the performance to industry averages, to an individual competitor's performance, or against a predetermined target.

For this assignment, read "Case study question 7.2: General Machinery Ltd" on page 168 in chapter 7 of our textbook, Accounting for Managers: Interpreting Accounting Information for Decision Making. Using the data from the case study, repond to the tasks below.

Tasks:

Consider the following scenario for this assignment: You are an external investor who is considering General Machinery as one of the potential companies for investment. Respond to the following in your initial discussion post:

1. Discuss the major issues facing the company.

2. Recommend what actions the company should take to improve its overall performance, addressing each of profitability, liquidity, gearing, activity, and shareholder return measures.

3. In what way does the Statement of Cash Flows help you to interpret the ratios and financial performance of the company?

4. What information does ratio analysis provide for meeting the requirements of the case questions?

5. Which ratios are the most important, and which ones are of limited value? Justify your choices for the scenario.

6. Why do you need to compare:

o The current year ratios with the prior year ratios?

o The ratios of competitors in the same industry or some other benchmark?

Other than the computations used in ratio analysis, what else is necessary to properly analyze a company for investment?

Assignment

Assigned questions for Module 2 are:

Q6-1: What are accounting standards?

Q6-2: Summarize the IASB's Framework for the Preparation and Presentation of Financial Statements.

Q6-3: A business has the following balances in its financial records: Income tax £30,000; Selling & administration expenses £80,000; Revenue £350,000; Interest expenses £15,000; Cost of Sales £190,000. How much is the Gross profit, Operating profit, and the Net Profit after tax?

Q6-4: What are some ways you can express the accounting equation?

Q6-5: The following items appear in a Statement of Financial Position: Receivables €200,000; Payables €350,000; Inventory €100,000; Non-current assets €750,000; Long-term loan €400,000. What is the balance of Shareholders' funds (SH Equity)?

Q6-6: ABC buys a smaller company XYZ for a negotiated price of £1 million. XYZ's assets are valued at £750,000. Assuming goodwill is amortized over 5 years, what is the value of goodwill in ABC's Statement of Financial Position at the end of the third year after acquisition?

Q6-7: What is Agency theory and what is it primarily concerned with?

Q7-1: What is the difference between ROI and ROCE ratios?

Q7-2: Use the following information extracted from ABC's Income Statement and Balance sheet to determine ABC's Days Sales Outstanding, Inventory Turn, and Payables Days Outstanding:

Sales £4,200,000; Gross profit £2,700,000; Receivables £630,000; Payables £275,000; Inventory £300,000. ABC calculates its financial ratios based on being open for business 6 days per week for 50 weeks per year.

Q7-3: A company has capital employed of €1,000,000 and generates a profit after tax of €300,000. Assume the company has a balance sheet with 60% debt. What is the ROI? Now assume the company has a balance sheet with 40% debt. What is the ROI?

Q7-4: A business has current assets of $35,000 and current liabilities of $20,000. It collects its receivables more quickly and uses $10,000 of its cash at bank to repay a long-term debt. What is the effect on the working capital ratio after the long-term debt is repaid?

Q8-1: How is inventory valued in the Balance Sheet (Statement of Financial Position)?

Q8-2: In a manufacturing business, when the company has completed production on inventory it wishes to sale, explain flow of costs for affected inventory accounts.

Q8-3: A business purchases inventory stock on four separate occasions. Purchased 3,500 units at a total cost of €8,050; Purchased 3,000 units at a total cost of €7,110; Purchased 4,000 units at a total cost of €9,600; and Sold 5,995 units at a total price of €24,760. Each purchase was completed in the order provided within the same period. Match the inventory method with the correct cost of sales and the correct value of inventory.