Accounting Project

Presented by Au Yick Kin

Wong Chu Wah

Accounting Project

Purpose of this project is a pre-study of Form 7 Principles of Accounts--accounting ratio.

Accounting Project Café de Coral Profit & Loss Account

Accounting Project Farewood Profit & Loss Account

(57,658) (126,034)Net Loss

Accounting Project Café de Coral Balance Sheet

Accounting Project Farewood Balance Sheet

Accounting Project We are going to analyze these two above companies’, Café

de Coral and Farewood, financial conditions, including profitability, liquidity, activity and efficiency, and return on capital employed. The business nature of these two companies is similar, which is fast food restaurant. In order to compare and analyze the financial conditions, we can use different accounting ratios. For example, the ratios of net profit to sales ratio, expenses to sales, return on total assets are utilized to analyze the profitability of the firms. The current ratio and quick ratio are used to analyze the liquidity of a firm.

Accounting Project Definition of Accounting Ratio: Profitability Gross Profit to Sales Ratio: Return on Total Assets: Gross Profit *100% Net Profit * 100% Sales Total Assets

Liquidity Current Ratio: Current Assets : 1 Current Liabilities

Activity and Efficiency Asset Turnover Ratio: Sales = Number in times Total Assets

Accounting Project Definition of Accounting Ratio: Return on Capital Employed Return on (Opening) Capital Employed Net Profit *100% Opening Capital

Return on (Closing) Capital Employed Net Profit *100% Closing Capital Return on (Average) Capital Employed Net Profit *100% Average Capital

Accounting Project The table of different accounting ratios of Café de Carol in

1998:(`000) Profitability: Net profit to sales Return to total asset

$142529 *100%=6.53% $142529 *100%= 11.3% $2181544 $1260627(921383+339244) Liquidity: Current ratio $339244:1=0.89:1 $380165

Activity and efficiency: Asset turnover ratio $2181544 =1.73 times $1260627 (921383+339244)

Accounting Project Return on capital employed Return on capital Return on capital (opening) employed (closing) employed $142529 *100%=20.1% $142529 *100%=17.96% $708585 $793477 Return on capital (average)employed $142529 *100%=18.89% ($708585+$793477)/2= $751031

Accounting Project The table of different accounting ratios of Farewood in

1998:(`000) Profitability: Net loss to sales Loss to total asset

$38397 *100%=3.6% $38397 *100%= 6.4% $1060342 ( $409986+185440) =595426 Liquidity: Current ratio $185440:1=1.3:1 $142767

Activity and efficiency: Asset turnover ratio $1060342 =1.78times $595420

Accounting Project Return on capital employed Loss on capital Loss on capital (opening) employed (closing) employed $38397 *100%=11.03% $38397 *100%=10.85% $347846 $353802 Loss on capital (average)employed $38397 $350824*100%=10.94%

Accounting Project Analysis: Now we are going to make a comparison between their profitability,

liquidity and future financial prospect by a thorough ratio analysis. First of all, we compare the profitability of Café de Carol and Farewood:

Profitability: Café de Carol had good profitability compared with that of Farewood .

As it had relatively high net profit to sales ratio (6.53%) and return on total assets ratio(11.3%).

Farewood only had low net profit to sales ratio(3.6%) and return on total assets ratio(6.4%).

Accounting Project Liquidity:

Farewood had a stronger liquidity position than that of Café de Carol . We can see that : The current ratio of Farewood (1.3:1) is larger than that of Café de

Carol (0.89:1).

Farewood had a good liquidity position and it could use the instant liquidity cash to repay the current liabilities in due course, whereas ,

in Café de Carol, the current liabilities are more than current assets.

Activity and efficiency

Café de Carol, and Farewood had a similar activity and efficiency.

Café de Carol had 1.73 number in times asset turnover ratio and Farewood had 1.78number in times asset turnover ratio.

They both had good asset turnover ratio. In accordance with this asset turnover ratio, although Farewood had lower net profit than that of Café de Carol, it didn’t mean Farewood was inefficient.

Accounting Project

Accounting Project The return on capital employed

The return on capital of Café de Carol is high by referring return on opening capital employed (20.1%), return on closing capital employed (17.96%) and return on average capital employed (18.98%).

The return of Farewood is too low in accordance with the return on opening capital employed (11.03%), return on closing capital employed (10.85%) and return on average capital employed (10.94%) .

The reasons of low return of capital employed may be the low level of net profit and over amount of capital.

The suggestion is that reducing the amount of capital by decreasing the investment or improving the profitability.

Accounting Project To conclude all accounting ratios,Café de Carol and Farewood both had

acceptable financial conditions and performances.

Café de Carol had higher net profit, turnover and return on capital. However, its current ratio was lower.It means that was rather dangerous.

Although Farewood had better current ratio, its net profit and return on capital was poor.

We advise that Café de Carol should put emphasis on controlling the working capital. For example, it should increase its cash or pay for creditors early and not to accumulate so much current liabilities,whereas,

Farewood should increase his sales or reduce the operation expenses because of lower level of net profit.

Thanks for Reading

Presented by Au Yick Kin

Wong Chu Wah