LOGO UNIVERSITI

ASSIGNMENT
JULY 2014 SEMESTER
COURSE NAME
COURSE CODE
PROGRAMME
STUDENTS NAME
MATRIX NUMBER
LECTURER
CENTER OF LEARNING
QUESTION P7-2A
[0]
(a I!"#$%&%'a$%(# (& I#$")#a* C(#$)(* +"a,#"--"-
1- Tickets produced were properly unnumbered by the organizer.
2- Trent, which was the organizer, had left the tickets to the students unguarded and
without proper and thorough guidance.
3- The tickets had been disposed without any proper documentation made on how many
tickets had been sold.
4- ecei!ed cash without any record made.
"- #aying out the cash without any record made.
6- $i!ing the cash bo% keys to the unauthorized personnel.
&- 'oney was counted without proper records.
(- )o cash receipts had been recei!ed after payment made.
*- )o proper documentation and recording had been made as a proof throughout the
e!ents.
(. S/00"-$%(# $( (1")'(2" $3" I#$")#a* C(#$)(* +"a,#"--"-4
1- Proper tickets numbering.
#repare tickets with proper numbering and record whereby they should do when each pre-
purchase tickets were made, they should include it with the name of the tickets owner
together with the numbering.
2- Custodian of tickets.
[1]
The tickets should be held by one responsible custody in order to ensure that the tickets will
be flew out properly and will be kept in a good manner when it is not sold during the pre-
purchase period. The, during the day of the e!ent, any walk-in purchase of tickets will be
monitored by the same person and helped by another person who guards the entrance.
3- Tickets need to be documented and recorded.
+ny unsold tickets that will be disposed shall be documented with the records of the tickets
number, so that the organizer shall trace back how many tickets had been sold and how many
tickets will be disposed together they can trace on how many tickets went missing in action.
4- Restrict access to petty cash and safe box.
The keys of petty cash and safety bo% should be gi!en custody only to authorized indi!iduals.
This matter should be recorded in the organizer,s proposals. -urthermore, it is needed that the
keys are duplicated with two or three copies and it is to be gi!en to the trusted person who
will be responsible to hold the keys as back up if there is something happen with the master
key.
- Cash count reconci!iation.
The petty cash should be counted and reconciled to the cashbook balance e!ery day along the
e!ent. This is a matter of counting up all the payments made since the last reimbursement and
counting in the cash bo%.
[2]
"- #eeps money coming in a$ay from money going out.
.t is a need to deposit any cash recei!ed straight to the back account rather than spending it
directly as what the organizer did. This will allow the bank signatories which in this case,
Trent himself, to e%ercise his authorization controls o!er withdrawal of cash.
%- &!$ays gi'e receipts for money recei'ed.
eceipts should be written in ink and make a duplicate copy for documentation. eceipts are
ideally to be printed and pre-numbered, stamped and signed by the person issuing the receipt.
+ny unused receipt books should be kept together with the petty cash in the safety bo% in
order to a!oid from the receipt being wrongly used by unauthorized personnel for their
fraudulent acti!ities.
(- &!$ays obtain receipts for money paid out.
eceipts when purchasing from outside market should be obtained as a proof that the money
out for a reason. .t is to be remembered that when no receipts means there is no proof that the
purchase was really made.
C(#'*/-%(#
/!ery organization should decide in ad!ance about who should do what in finance and other
procedures. .t is a good practice to record what has been decided and its purpose is to clarify
who has the authority to do such things.
[3]
Therefore, there will be a good internal control practices throughout the e!ent and at the end
of the day, any 0uestion asked by the #rinciple amirez could be answered in proper manner
and if #rinciple amirez trying to audit or do post mortem on the e!ent, e!erything will be in
order for the checking and audit procedure.
QUESTION BYP15-6
Q/"-$%(# a
i. Current Ratio
7 C/))"#$ A--"$-
C/))"#$ L%a.%*%$%"-
C('a C(*a P"8-% C(*a
1 ' 1&,""1 1
'
12,"&1
' 13,&21 ' (,&"2
1 1.2( 1 1.44
The ratio is mainly used to gi!e an idea of the company3s ability to pay back its short-term
liabilities which are debt and payables with its short-term assets which are cash, in!entory
and recei!ables. The higher the current ratio, the more capable the company is of paying its
obligations.
+ ratio under 1 suggests that the company would be unable to pay off its obligations if they
came due at that point. 4hile this shows the company is not in good financial health, it does
[4]
not necessarily mean that it will go bankrupt as there are many ways to access financing, but
it is definitely not a good sign.
+s we look at the 5oca 5ola,s current ratio, it shows that the current ratio is 1.2(.
'eanwhile, the #epsi5o,s current ratio is at 1.44. This shows that both companies are
efficient in their operating cycle and able to turn its products into cash.
6oth companies will ha!e trouble getting paid on their recei!ables or ha!e long in!entory
turno!er can run into li0uidity problems because they are unable to alle!iate their obligations.
6ecause business operations differ in each industry, it is always more useful to compare
companies within the same industry.
ii. &ccounts Recei'ab!e Turno'er
7 N"$ C)"!%$ Sa*"-
A1")a0" A''(/#$- R"'"%1a.*"
C('a C(*a P"8-% C(*a
1 ' 37,**7 1 ' 43,232
' 3,424 ' 4,2"4
1 *.7" 1 *.2*
8ince the recei!ables turno!er ratio measures a business3s ability to efficiently collect its recei!ables,
it only makes sense that a higher ratio would be more fa!ourable. 9igher ratios mean that companies
are collecting their recei!ables more fre0uently throughout the year. .f a ratio of 2 means that the
company will be collecting its a!erage recei!ables twice during the year.
[5]
.n other words, this company is collecting is money from customers e!ery si% months. +ccounts
recei!able turno!er also is an indication of the 0uality of credit sales and recei!ables. + company with
a higher ratio shows that credit sales are more likely to be collected than a company with a lower
ratio. 8ince accounts recei!able are often posted as collateral for loans, 0uality of recei!ables is
important.
+s we can see at the 5oca cola,s account recei!able ratio, it shows that the company had resulted *.7"
and #epsi5o,s ratio is at *.2*. This means that the company had managed to collect its recei!able for
* times for both company during that particular years. 9igher efficiency is fa!ourable from a cash
flow standpoint as well. .f both companies can collect cash from customers sooner, it will be able to
use that cash to pay bills and other obligations sooner.
iii. &'erage Co!!ection Period
7 A1")a0" A''(/#$ R"'"%1a.*" 9 5:6
Sa*"- R"1"#/"
C('a C(*a P"8-% C(*a
1 ' 3,424 % 32" 1 ' 4,2"4 % 32"
' 37,**7 ' 43,232
1 47.33 or 47 days 1 3*.2* or 3* days
:ike recei!ables turno!er ratio, a!erage collection period is of significant importance when
used in con;unction with li0uidity ratios. + short collection period means prompt collection
and better management of recei!ables. + longer collection period may negati!ely affect the
short-term debt paying ability of the business in the eyes of analysts.
[6]
.f we look at 5oca 5ola,s a!erage collection period, it shows that the company managed to
collect its recei!able at 47 days. 'eanwhile, #epsi5o managed to collect its recei!able at 3*
days. 4hether a collection period is good or bad depends on the credit terms allowed by the
company.
-or e%ample, if the a!erage collection period of a company is "7 days and the company
allows credit terms of 47 days then the a!erage collection period is worrisome. <n the other
hand, if the company,s credit terms are 27 days then the a!erage collection period of "7 days
would be considered !ery well.
i'. )n'entory Turno'er
7 C(-$ (& G((!- S(*!
A1")a0" I#1"#$();
C('a C(*a P"8-% C(*a
1 ' 11,7(( 1 ' 27,7**
' 2,2&1 ' 2,"&7
1 4.(( or " times 1 &.(2 or ( times
.n!entory turno!er is a measure of how efficiently a company can control its merchandise, so
it is important to ha!e a high turn. This shows the company does not o!erspend by buying too
much in!entory and wastes resources by storing non-saleable in!entory. .t also shows that the
company can effecti!ely sell the in!entory it buys.
[7]
.f we look at 5oca 5ola,s in!entory turno!er ratio, it shows that the company ha!e the ability
to sell off its in!entory for " times. 'eanwhile, the #epsi5o,s in!entory ratio shows that the
company is able to sell off its in!entory for ( times which is more efficient than 5oca 5ola.
This measurement also shows in!estors how li0uid a company3s in!entory is. Think about it.
.n!entory is one of the biggest assets a retailer like 5oca 5ola and #epsi5o,s reports on its
balance sheet. .f this in!entory cannot be sold, it is worthless to the company. This
measurement shows how easily a company can turn its in!entory into cash.
'. *ays in )n'entory
7 A1")a0" I#1"#$(); 9 5:6
C(-$ (& G((!- S(*!
C('a C(*a P"8-% C(*a
1 ' 2,2&1 % 32" 1 ' 2,"&7 % 32"
' 11,7(( ' 27,7**
1 &4.&2 or &" days 1 42.2& or 4& days
The formula to calculate days in in!entory is the number of days in the period di!ided by the
in!entory turno!er ratio. This formula is used to determine how 0uickly a company is
con!erting their in!entory into sales.
+ slower turnaround on sales may be a warning sign that there are problems internally, such
as brand image or the product, or e%ternally, such as an industry downturn or the o!erall
economy.
[8]
+s we can at the calculation stated abo!e, 5oca 5ola,s manage to turn its in!entory into sales
for &" days and #epsi5o only needs 4& days to turn its in!entory into sales. This shows that
#epsi5o,s efficiency in turning its in!entory into sales are more better than 5oca 5ola
because, the more days taken to turnaround the sales will show a sign of something is wrong
internally or something e%ternally had cause the slower sales.
'i. Current Cost *ebt Co'erage
7 N"$ Ca-3 P)(1%!"! .; O8")a$%#0 A'$%1%$%"-
A1")a0" C/))"#$ L%a.%*%$%"-
C('a C(*a P"8-% C(*a
1 ' (,1(2 1 ' 2,&*2
' 13,3"" ' (,&&2
1 7.21 1 7.&&
5urrent 5ost =ebt 5o!erage ratio also known as debt ser!ice co!erage ratio which is a
financial ratio that measures a company3s ability to ser!ice its current debts by comparing its
net operating income with its total debt ser!ice obligations.
.n other words, this ratio compares a both 5oca 5ola and #epsi5o company3s a!ailable cash
with its current interest, principle and sinking fund obligations. The ratios for both companies
are 7.21 and 7.&& particularly.
[9]
The debt ser!ice co!erage ratio is important to both creditors and in!estors, but creditors
most often analyze it. 8ince this ratio measures both firm3s ability to make its current debt
obligations, current and future creditors are particularly interest in it. 5reditors not only want
to know the cash position and cash flow of a company, they also want to know how much
debt it currently owes and the a!ailable cash to pay the current and future debt.
Q/"-$%(# .
i. Tota! *ebt Ratio
7 T($a* L%a.%*%$%"-
T($a* A--"$-
C('a C(*a P"8-% C(*a
1 ' 23,(&2 1 ' 23,744
' 4(,2&1 ' 3*,(4(
1 7.4* 1 7."(
The debt ratio 0uantifies how le!eraged a company is and a company3s degree of le!erage is
often a measure of risk. 4hen the debt ratio is high, the company has a lot of debt relati!e to
its assets. .t is thus carrying a bigger burden in the sense that principal and interest payments
take a significant amount of the company3s cash flows and a hiccup in financial performance
or a rise in interest rates could result in default.
+s we can see from the calculation abo!e, the total debt ratio for 5oca 5ola showed 7.4* and
for #epsi5o showed 7."(. 4hen the debt ratio is low, principal and interest payments do not
command such a large portion of the company3s cash flows and both of the companies are not
as sensiti!e to changes in business or interest rates from this perspecti!e.
[10]
9owe!er, a low debt ratio may also indicate that the companies ha!e an opportunity to use
the le!erage as a means of responsibly in order to grow the business that it is not taking the
ad!antage of.
ii. Time )nterest +arned
7 Ea)#%#0- B"&()" I#$")"-$ a#! Ta9 (EBIT
I#$")"-$ E98"#-"
C('a C(*a P"8-% C(*a
1 ' 2,(24 > ' 2,747 > ' 3"" 1 ' ",*42 > ' 2,177 > ' 3*&
' 3"" ' 3*&
1 ' *,21* 1 ' (,443
' 3"" ' 3*&
1 2".*& 1 21.2&
Times interest earned ?also called interest co!erage ratio@ is the ratio of earnings before
interest and ta% ?/6.T@ of a business to its interest e%pense during a gi!en period. .t is a
sol!ency ratio measuring the ability of a business to pay off its debts.
The ratio of 5oca 5ola is shown at 2".*&, meanwhile, #epsi5o shown a result at 21.2&. This
is to be said that both company,s ratios are good and fa!ourable. 9igher !alue of times
interest earned ratio is fa!ourable meaning greater ability of a business to repay its interest
and debt. :ower !alues are unfa!ourable. That means, both company had done well in
managing their interests to be paid along the period.
[11]
+ ratio of 1.77 means that income before interest and ta% of the business is ;ust enough to pay
off its interest e%pense. That is why times interest earned ratio is of special importance to
creditors of both companies. They can compare the debt repayment ability of similar
companies using this ratio. <ther things e0ual, a creditor should lend to a company with
highest times interest earned ratio. .t is also beneficial to create a trend of times interest
earned ratio.
iii. Cash *ebt Co'erage
7 O8")a$%#0 Ca-3 F*(+
T($a* D".$
C('a C(*a P"8-% C(*a
1 ' (,1(2 1 ' 2,&*2
' 23,(&2 ' 23,744
1 7.34 1 7.2*
5urrent cash debt co!erage ratio is a li0uidity ratio that measures the relationship between net
cash pro!ided by operating acti!ities and the a!erage current liabilities of the company. .t
indicates the ability of the business to pay its current liabilities from its operations.
The calculation abo!e shows a cash debt co!erage ratio of 5oca 5ola at 7.34. 'eanwhile, for
#epsi5o, the cash debt co!erage ratio showed a result of 7.2*. This indicates that ability of
both companies to pay its current liabilities from its operations.
[12]
The two components of the formula are net cash pro!ided by operating acti!ities and a!erage
current liabilities. The net cash pro!ided by operating acti!ities is the net cash generated from
its operations during a particular period. The a!erage current liabilities are e0ual to opening
liabilities plus closing liabilities di!ided by two.
i'. ,ree Cash ,!o$
7 O8")a$%#0 Ca-3 F*(+ - Ca8%$a* E98"#!%$/)" 9 100
O8")a$%#0 Ca-3 F*(+
C('a C(*a P"8-% C(*a
1 ' (,1(2 - ' 1,**3 % 177 1 ' 2,&*2 - ' 2,12(
' (,1(2 ' 2,&*2
1 ' 2,1*3 % 177 1 ' 4,22(
' (,1(2 ' 2,&*2
1 &2 A 1 2* A
-ree cash flow is most often defined as operating cash flow minus capital e%penditures,
which, in analytical terms, are considered to be an essential outflow of funds to maintain a
company3s competiti!eness and efficiency. + measure of financial performance calculated as
operating cash flow minus capital e%penditures.
-ree cash flow represents the cash that a company is able to generate after laying out the
money re0uired to maintain or e%pand its asset base. -ree cash flow is important because it
allows a company to pursue opportunities that enhance shareholder !alue. 4ithout cash, it is
tough to de!elop new products, make ac0uisitions, pay di!idends and reduce debt.
[13]
+s we can see in the calculation abo!e, the -ree 5ash -low ratio for 5oca 5ola had resulted
to &2A. 'eanwhile, for the company #epsi5o, the free cash flow ratio had resulted to 2*A
which means 5oca 5ola had managed to retain higher cash flow than #epsi5o. .t is important
for both companies to retain higher cash flow in order to sur!i!e for long term.
This is because the cash flow is a main factor that will indicate both 5oca 5ola and #epsi5o,s
financial strength whereby it needs higher free cash flow percentage if they ha!e further plans
to e%pand their business in the future. .t is also important for them to sustain the financial
stability of the company if there is going to be an economic downturn that will affect the
buying power of the consumer which automatically will affect their products and sales
performance.
The cash flow remaining after this deduction is considered as free cash flow, which becomes
a!ailable to a company to use for e%pansion, ac0uisitions or financial stability to weather
difficult market conditions. The higher the percentage of free cash flow embedded in a
company3s operating cash flow, the greater the financial strength of the company
Q/"-$%(# '
i. Profit -argin
7 N"$ I#'(2" 9 100
T($a* Sa*"-
C('a C(*a P"8'% C(*a
[14]
1
'
2,(24 % 177 1 ' ",*42 % 177
' 37,**7 > ' 11,7(( ' 43,232 > ' 27,7**
1 ' 2,(24 % 177 1 ' ",*42 % 177
' 42,7&( ' 23,331
1 12.22A 1 *.3*A
+ ratio of profitability calculated as net income di!ided by re!enues, or net profits di!ided by
sales. .t measures how much out of e!ery dollar of sales a company actually keeps in
earnings. #rofit margin is !ery useful when comparing companies in similar industries. +
higher profit margin indicates a more profitable company that has better control o!er its costs
compared to its competitors.
.f we look at 5oca 5ola,s percentage of profit margin, it shows that the company managed to
get its profit margin for 12.22A. 'eanwhile, #epsi5o managed to get its profit margin only
for *.3*A for the year. This means that 5oca 5ola had managed to earn more profit compared
to #epsi5o for that particular year.
:ooking at the earnings of a company often does not tell the entire story. .ncreased earnings
are good, but an increase does not mean that the profit margin of a company is impro!ing.
-or instance, if a company has costs that ha!e increased at a greater rate than sales, it leads to
a lower profit margin. This is an indication that costs need to be under better control.
ii. &ssets Turno'er
7 N"$ Sa*"-
[15]
A1")a0" T($a* A--"$-
C('a C(*a P"8-% C(*a
1 ' 37,**7 1 ' 43,232
' 44,"*" ' 3&,*21
1 7.2* 1 1.14
+sset turno!er ratio is the ratio of a company3s sales to its assets. .t is an efficiency ratio
which tells how successfully the company is using its assets to generate re!enue.
+s we can see in the calculation abo!e, the company 5oca 5ola had managed to get its asset
turno!er ratio for 7.2* while #epsi5o had managed to get 1.14 of its assets turno!er ratio.
This means that #epsi5o had successfully used its assets in order to generate more turno!er
to the company. 5oca 5ola needs to be more careful in using its assets in order to generate
higher turno!er for the company.
.f a company can generate more sales with fewer assets it has a higher turno!er ratio which
tells it is a good company because it is using its assets efficiently. + lower turno!er ratio tells
that the company is not using its assets optimally.
iii. Return on &ssets
7 N"$ I#'(2"
T($a* A--"$-
C('a C(*a P"8-% C(*a
1 ' 2,(24 1 ' ",*42
' 4(,2&1 ' 3*,(4(
1 7.14 1 7.1"
[16]
eturn on assets is the ratio of annual net income to a!erage total assets of a business during
a financial year. .t measures efficiency of the business in using its assets to generate net
income. .t is a profitability ratio. )et income is the after ta% income. .t can be found on
income statement.
+!erage total assets are calculated by di!iding the sum of total assets at the beginning and at
the end of the financial year by 2. Total assets at the beginning and at the end of the year can
be obtained from year ending balance sheets of two consecuti!e financial years.
eturn on assets indicates the number of cents earned on each dollar of assets. Thus higher
!alues of return on assets show that business is more profitable. This ratio should be only
used to compare companies in the same industry. The reason for this is that companies in
some industries are most asset-insensiti!e as they need e%pensi!e plant and e0uipment to
generate income compared to others.
Their <+ will naturally be lower than the <+ of companies which are low asset-
insensiti!e. +n increasing trend of <+ indicates that the profitability of the company is
impro!ing. 5on!ersely, a decreasing trend means that profitability is deteriorating.
i'. Return on Common .tockho!der/s +0uity
7 N"$ I#'(2" - D%1%!"#! Pa%!
S$(',3(*!")<- E=/%$;
C('a C(*a P"8-% C(*a
1 ' 2,(24 - ' 3,(77 1 ' ",*42 B ' 2,&32
' 22,232 ' 14,""2
1 ' 3,724 1 ' 3,214
' 22,232 ' 14,""2
[17]
1 7.13 1 7.22
eturn on common e0uity ?<5/@ or return on capital is the ratio of net income of a business
during a year to its stockholders3 e0uity during that year. .t is a measure of profitability of
stockholders3 in!estments. .t shows net income as percentage of shareholder e0uity.
)et income is the after ta% income whereas a!erage shareholders3 e0uity is calculated by
di!iding the sum of shareholders3 e0uity at the beginning and at the end of the year by 2. The
net income figure is obtained from income statement and the shareholders3 e0uity is found on
balance sheet.
eturn on common e0uity is an important measure of the profitability of a company. 9igher
!alues are generally fa!ourable meaning that the company is efficient in generating income
on new in!estment. .n!estors should compare the <5/ of different companies and also
check the trend in <5/ o!er time. 9owe!er, relying solely on <5/ for in!estment
decisions is not safe. .t can be artificially influenced by the management, for e%ample, when
debt financing is used to reduce share capital there will be an increase in <5/ e!en if
income remains constant.
QUESTION E12-14
[18]
[19]
Ta*%&"))( C()8
S$a$"2"#$ (& Ca-3 F*(+ $3" ;"a) "#!"! 2014
Ca-3 F*(+ &)(2 (8")a$%#0 a'$%1%$%"-
5ash recei!ed from customer

"22,177
5ash paid from operating acti!ities

?&&,777@
5ash paid for goods and ser!ices

?2&*,177@
5ash generated from operating acti!ities

217,777
.nterest paid

?22,477@
Ta%es

?**,777@
NET CAS> FLO? FROM OPERATING ACTI@ITIES

AAB:00
Ca-3 F*(+ &)(2 %#1"-$%#0 a'$%1%$%"-
5ash paid to purchase of e0uipment

?113,277@
5ash recei!ed from sale of building

1*&,277
NET CAS> FLO? FROM IN@ESTING ACTI@ITIES

A4B400
Ca-3 F*(+ &)(2 &%#a#'%#0 a'$%1%$%"-
5ash recei!ed from issuing common stock

3"",777
5ash used to purchase treasury stock

?4(,177@
5ash paid to redeem bond at maturity

?277,777@
5ash di!idends paid

?21,(77@
NET CAS> FLO? FROM FINANCING ACTI@ITIES

A6B100
NET INCOME IN CAS> C CAS> EQUI@ALENT

26AB100
CAS> C CAS> EQUI@ALENT AT BEGINNING PERIOD

11B000
CAS> C CAS> EQUI@ALENT AT END PERIOD

2:DB100