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Accounting Project - EMBA Cohort 43 Group33 - FinalSubmission

The document summarizes an accounting project analyzing the financial statements of Highland Malt. It includes: 1) Assumptions made in preparing the financial statements, such as applying accrual accounting and absorption costing. 2) A calculation and analysis of financial ratios in 2018 and 2019 to assess Highland Malt's financial health and liquidity. 3) Recommendations that Highland Malt reduce operating costs to improve profitability, and invest cash in interest-bearing assets.

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odlivingston
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341 views4 pages

Accounting Project - EMBA Cohort 43 Group33 - FinalSubmission

The document summarizes an accounting project analyzing the financial statements of Highland Malt. It includes: 1) Assumptions made in preparing the financial statements, such as applying accrual accounting and absorption costing. 2) A calculation and analysis of financial ratios in 2018 and 2019 to assess Highland Malt's financial health and liquidity. 3) Recommendations that Highland Malt reduce operating costs to improve profitability, and invest cash in interest-bearing assets.

Uploaded by

odlivingston
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Accounting Project

E/MBA Class
of May 2023
Group #33
Ronke Aramide Adenle [email protected]

Julia Baum [email protected]

Livingston Daniel Okphakalu [email protected]

© 2021 Pedago, LLC. All rights reserved. 6/24/21


Accounting Project

Discussion - Highland Malt: Accounting Policy Choices in Financial Statements

1) Assumptions
The financial statements of Highland Malt have been prepared under the following assumptions
identified by our group (additional to the ones listed in the project prompt):
- Accrual Accounting is applied, Financial Accounting is applied;
- Matching Principle is applied, Absorption Costing is applied;
- Factory Lease and Shipment/Equipment Lease are treated as operating leases;
- Principal of Bank Loan will be paid back in full on 1st January 2020.

2) Analysis of Financial Health


The following ratios have been calculated to assess the firm’s financial health:
Name 2018 2019
1. Current Ratio - 20.7
2. Quick Ratio - 13.2
3. Debt-to-Equity (DE) 0.066 -
4. Debt-to-Assets (DA) 0.063 -
5. Operating Margin - 0.022
6. Net Margin - 0.02
7. Return on Equity (ROE) -0.0066 0.048
8. Return on Assets (ROA) -0.0063 0.048

3) Recommendations
a) Liquidity and Solvency
Assessing the Current Ratio and Quick Ratio, we conclude that Highland Malt was not liquid in
2018 due to only producing inventory without selling, yet highly liquid in 2019. The company
was able to meet its short-term obligations in 2019. Yet, Highland Malt held a lot of liquid assets
(cash) in 2019 and we suggest that the company should make better use of its cash by investing,
for example into bonds which are easily tradeable if the need arises, hence earning interest.
Debt-to-Equity and Debt-to-Assets in 2018 were both low which indicates that the company was
neither operating nor financed on debts.

b) Efficiency and Profitability


In 2019, both the Operating Margin and Net Margin were low. We conclude that the overall
operating costs of Highland Malt were too high, the company did not operate efficiently and was
not very profitable. We suggest that the company should reduce overall operating costs where
possible.
In 2018, Highland Malt did not use its funds effectively and was not profitable as indicated by
the negative ratios of Return on Equity and Return on Assets. In comparison, 2019 was a more
effective and profitable year for the company although the ratios were still low.

© 2021 Pedago, LLC. All rights reserved. 8/2/21 2


Accounting Project

APPENDIX

A) Calculation of key entries in balance sheet and financial statements: Highland Malt

1) 2018
Cash = $750,000 + $50,000 - $5,000 - $300,000 - $325,000
Inventory = $300,000 + $325,000
Retained Earnings = $0
Sales Revenues = $0
COGS = $0
Operating Expenses = $0

2) 2019
Cash = $ 2,500,000 - $50,000 - $5,000 - $50,000 - $90,000 - $50,000 - $75,000 - $250,000 -
$1,450,000
Inventory = $ 700,000 + $750,000 -$300,000 - $325,000 - $700,000 - $375,000
Retained Earnings = $2,500,000 - $1,700,000 - $390,000 - $355,000
Sales Revenues = $ 2,400,000 + $100,000
COGS = $300,000 + $325,000 + $700,000 + $375,000
Operating Expenses = $ 90,000 + $50,000 + $250,000
SG&A = $230,000 + $75,000 + $50,000

B) Multi-Year Balance Sheet: Highland Malt


Account As of 31st December 2018 As of 31st December 2019
Current Assets
Cash $170,000 $550,000
Inventory $625,000 $375,000
Accounts Receivable $0 $100,000
Interest Expense $5,000 $10,000
Total Assets: $800,000 $1,035,000

Current Liabilities
Bank Loan Payable $0 ($50,000)
Long-Term Liabilities
Bank Loan Payable $50,000 $0
Total Liabilities: $50,000 ($50,000)

Equity
Paid-in Capital $750,000 $750,000
Director’s Loan $0 $230,000
Retained Earnings $0 $55,000
Total Equity: $750,000 $1,035,000

Total Liabilities & Equity: $800,000 $1,035,000

© 2021 Pedago, LLC. All rights reserved. 8/2/21 3


Accounting Project

C) Multi-Year Income Statement: Highland Malt


Account For period ending For period ending
31st December 2018 31st December 2019
Revenue $0 $2,500,000
COGS $0 $1,700,000
Gross Profit: $0 $800,000
Operating Expenses $0 $390,000
SG&A $0 $355,000
EBI: $0 $55,000
Interest Expense $5,000 $5,000
Net Income (Loss): ($5,000) $50,000

D) Multi-Year Cash Flow Statement: Highland Malt


Account For period ending For period ending
31st December 2018 31st December 2019
Net Income ($5000) $50,000
Change in Inventory ($625,000) $250,000
Accounts receivable $0 ($100,000)
Total Operating Cash Flows: ($630,000) $200,000

Purchase of PP&E $0 $0
Total Investing Cash Flows: $0 $0

Increase in Paid-in Capital $750,000 $0


Increase in Bank Loan Payable $50,000 ($50,000)
Increase in Director’s Loan $0 $230,000
Total Financing Cash Flows: $800,000 $180,000

Total Cash Flows: ($170,000) $380,000


Beginning Cash Flows: $0 $170,000
Ending Cash Flows: ($170,000) $550,000

E) Calculation of ratios:

Current Ratio = Current Assets / Current Liabilities


Quick Ratio = Current Assets – Inventory / Current Liabilities
Debt-to-Equity (DE) = Liabilities / Equity
Debt-to-Assets (DA) = Liabilities / Assets
Operating Margin = Operating Profit / Revenue
Net Margin = Net Income / Revenue
Return on Equity (ROE) = Net Income / Equity
Return on Assets (ROA) = Net Income / Assets

© 2021 Pedago, LLC. All rights reserved. 8/2/21 4

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