ACC 308 Final Project Management Memo

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Southern New Hampshire University *

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ACC308

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Management

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Feb 20, 2024

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1 Management Analysis Memo Amanda Haupt Southern New Hampshire University

2 A financial ratio analysis report is a useful management tool that will improve understanding of financial results and trends over time, and provide signs of the organizations performance. Managers will use ratio analysis to identify strengths and weaknesses in order to form strategies and initiatives to insure future success. Stockholders may use ratio analysis to measure the company’s results against other organizations or make judgments regarding management effectiveness or the company’s overall mission. Peyton Approved Ratio Analysis 2017 2016 Current Ratio (Working Capital) 5.76 5.18 Quick Ratio 5.60 5.67 A/R Turnover 3.16 2.89 Inventory Turnover 7.66 8.81 Gross Margin 68% 66% Return on Sales 53% 52% Return on Equity 125% 160% Return on Assets 101% 108% Peyton Approved will use the Current (Working) Ratio and Quick Ratio to measure the company’s ability to pay off their current liabilities using their current assets. In 2016, Peyton Approved had a current ratio of 5.18. This figure shows that the company has 5 times more current assets than current liabilities in order to cover its debts. In 2017, the company’s current ratio showed a slight increase to 5.76. This indicates that the company has been consistently able of paying off their short term debts with their current assets. The quick ratio is similar to the current ratio but only calculates using the cash and accounts receivable. The quick ratio in 2016 and 2017 was 5.67 and 5.60, respectively. Both of these figures show

3 that Peyton Approved has a consistent ability managing its debts and capable of handling unanticipated financial emergencies if they were to develop. The A/R Turnover is a measurement of how efficiently a company is able to collect on the credit that it extends to customers. A company that is good at collecting on its credit will have a higher accounts receivable turnover ratio. The Peyton Approved A/R turnover ratio in 2016 was 2.89 and increased to 3.16 in 2017. This increase is a positive sign that the company is improving its ability to collect from customers that owe the debt. The inventory turnover is a financial ratio showing how many times a company has sold and replaced inventory during a given period. This shows how well a company is at turning its inventory into sales. In 2016, the inventory turnover ratio was 8.81 and decreased to 7.66 in 2017. Even though, there was a decrease in the inventory ratio between these two years, it does not indicate that the company is struggling to turn its inventory into sales. Such a small decrease could be a result of the company creating extra stock for potential future sales. The gross margin ratio is the portion of each sales dollar remaining after a seller has accounted for the cost of the goods sold to a buyer. In 2016, the Peyton Approved gross margin ratio was 66% and increased to 68 the following year. This shows, for example, that in 2017 for every dollar the company generates, $0.68 is retained and $0.32 is paid towards the cost of goods sold. Next, the return on sales is used to show how efficiently a company turns revenue into profit. The Peyton Approved return on sales for 2016 was 52% and they showed a small increase in 2017 to 53%. The slight increase indicates that the company has been able to continuously increase revenue while potentially decreasing expenses. The company’s return on equity and return on assets are indicators of the company’s profitability. The return on equity measures the rate of return that the shareholders of

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4 the company receive. In 2016, the return on equity was 160% and decreased to 125% in 2017. These numbers indicate that the company was not able to increase or sustain the profits on each dollar invested by its shareholders. The return on assets is an indicator of how profitable a company’s assets are in generating revenue. Peyton Approved showed a slight decrease in the return on assets in 2016 and 2017 with the figures of 108% to 101% respectively. These numbers are very good, however there was a decrease that could have been caused by the company over investing in assets or having assets on hand that have not yet generated any revenue. Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. The method for calculating compound interest is the total amount of principal and interest in future minus the principal amount at present. A compound interest rate is beneficial to company as it generates more interest than simple interest rate due to the interest on top of interest. It is imperative to practice ethical reporting and follow standard practices when conveying accounting information. Many of the financial documents are used by managers and stockholders to make important decisions that will certainly effect a company’s financial future. The GAAP refers to a common set of accounting principles, standards, and procedures that public companies in the U.S. must follow when their accountants compile their financial statements. For example, accountants commit to applying the same standards throughout the reporting process, from one period to the next, to ensure financial comparability between periods. These and other regulations set forth by the GAAP are crucial in the business world to insure that company’s and stakeholders can make informed decisions in regard to their investments.

5 Pro forma is a Latin term that means “for the sake of form”, it is a method of calculating financial results using certain projections or presumptions. Pro forma financials are not computed using GAAP and usually leave out one-time expenses that are not part of normal company operations. Pro forma financial documents are used internally by management for aiding in business decisions. It is illegal for publicly traded companies to mislead investors with pro forma financial results that do not use the most conservative possible approximations. When reviewing the pro forma statements we can identify that the company is planning on expansion in that they are hiring three new associates. The $25,000 per employee shows as a wage expense of $75,000.00. Planning ahead for the new employees with the pro forma statements allows the company to properly allocate the funds to avoid a deficit in other expenses in the future. By managing their debt, the business can stay ahead of potentially negative outcomes from unpredictable expenses. A contingent liability is a liability that may or may not occur. The relevance of a contingent liability depends on the probability of it becoming an actual liability and the accuracy with which the amount associated with it can be estimated. Some examples of a contingent liabilities are a product warranty, guarantees on debts, outstanding lawsuits, and government probes. Inventory cost includes the costs to order and hold inventory. This cost can be examined by management to help determine how much inventory to keep on hand. Revenue recognition is a generally accepted accounting principle that specifies how and when revenue is to be documented. Typically , revenue is recognized when a critical event has occurred, and the dollar amount easily identified by the company. Pro forma financial statements are used as an educated prediction as to what a business can expect in the future. These statements are not made up of actualities in the financial picture,

6 they are estimations. While pro forma statements can give an accurate depiction of operations, it is still important the adjustments are made following GAAP to insure accuracy at the highest level possible. Peyton Approved can use this information to weigh the possible pros and cons prior to expanding its operations.

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7 References Bragg, S. (n.d.). Gross margin ratio definition . AccountingTools. https://www.accountingtools.com/articles/gross-margin-ratio.html Contingent Liability - How to Use and Record Contingent Liabilities . (2019). Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/knowledge/accounting/what-is- contingent-liability/ Fernando, J. (2021, September 2). Generally Accepted Accounting Principles (GAAP) . Investopedia. https://www.investopedia.com/terms/g/gaap.asp Financial Ratio Analysis A GUIDE TO USEFUL RATIOS FOR UNDERSTANDING YOUR SOCIAL ENTERPRISE’S FINANCIAL PERFORMANCE . (2013). https://www.demonstratingvalue.org/sites/default/files/resource-files/Financial%20Ratio %20Analysis%20Dec%202013.pdf Kagan, J. (2019). Compound interest definition . Investopedia. https://www.investopedia.com/terms/c/compoundinterest.asp Know Accounts Receivable and Inventory Turnover . (n.d.). Investopedia. Retrieved May 22, 2022, from https://www.investopedia.com/articles/personal-finance/081215/know- accounts-receivable-inventory-turnover.asp#:~:text=Accounts%20receivable %20turnover%2C%20or%20A%2FR%20turnover%2C%20is%20calculated Tuovila, A. (2019). Pro forma. Investopedia. https://www.investopedia.com/terms/p/proforma.asp

ACC 308 Final Project Management Memo

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