Table of Contents

Contents
Introduction................................................................................................................................................3
Major findings............................................................................................................................................4
Scenario 1..............................................................................................................................................4
Scenario 2..............................................................................................................................................8
Scenario 3..............................................................................................................................................14
Conclusion...............................................................................................................................................19
References..............................................................................................................................................20
Introduction

In this essay, I will prepare financial statements for a sole trader business, interpret Financial
Statement and use spreadsheets to create budgets to make a plan, control and make decision.
Major findings
Scene 1
Task 1

Income statement ending September 30, 2023 of MT business

Income statement
Revenue
Service revenue 255,000
Total revenue 255,000

Expense
Supplies expenses 90,000
Salaries and wages expenses 65,000
Depreciation expenses 9,000
Rent expenses 60,000
Utilities expenses 12,000
Total Expense 236,000
Net income 19,000

Financial statement as of September 30, 2023 of MT Business

Trial balance
Account
Debit
Cash 29000
Receivables 2500
Supplies 12000
Prepaid rent 10000
Equipment 75000
Accumulated Depreciation
Accounts payable
Salaries payable
Taylor's Capital
Unearned service revenue
Service revenue
Salaries and wages expenses 5500
Rent expense 6000
Supplies expense
depreciation expense
Utilities expense
Total 140000
Task 2

Adjustment:

Trial balance Adjustment Adjusted trial balance

Account
Debit Credit Debit Credit Debit Credit
Cash 29,000 29,000
Receivables 2,500 2,500
Supplies 12,000 6,000 6,000
Prepaid rent 10,000 10,000
Equipment 75,000 75,000
Accumulated Depreciation 5,000 750 5,750
Accounts payable 10,000 1,000 11,000
Salaries payable 50 50
Taylor's Capital 104,000 104,000
Unearned service revenue 2,000 2,000 -
Service revenue 19,000 2,000 21,000
Salaries and wages expenses 5,500 50 5,550
Rent expense 6,000 6,000
Supplies expense 6,000 6,000
depreciation expense 750 750
Utilities expense 1,000 1,000
Total 140,000 140,000 141,800 141,800

Prepaid rent 10,000

Equipment 75,000
Accumulated Depreciation
Accounts payable
Salaries payable
Taylor's Capital
Unearned service revenue
Service revenue
Salaries and wages expenses 5,500
Rent expense 6,000
Supplies expense
depreciation expense
Utilities expense
Total 140,000
Income statement of MT business ending October 31/ 2023

Adjusted trial balance

Debit Credit
29,000
2,500
6,000
10,000
75,000
5,750
11,000
50
104,000
-
21,000

financial statement of October 31/2023 of MT business

Adjusted trial balance

Debit Credit
29,000
2,500
6,000
10,000
75,000
5,750
11,000
50
104,000
-
21,000
5,550
6,000
6,000
750
1,000
141,800 141,800
Scene 2

1. Calculate ratios (Pauline Weetman, 2019).

Financial ratio ratio Formula 2022 Unit

Total asset turnover Revenue/ Average total assets 1.22 times
Average inventory turnover period 365* Average inventory/ COGS 115.73 days
Efficiency ratio
Average settlement period for trade receivables 365*Average Trade Receivables/Revenue 97.14 days
Average settlement period for trade payables 365*Average Trade Payables/COGS 11.13 days
Net profit margin 100*Net Income/Revenue 15.00 %
Gross profit margin 100*(Revenue – COGS)/Revenue 33.87 %
Profitability ratio
ROA 100*Net Income / Average Total Assets 18.24 %
ROE 100*Net Income / Average Total Equity 28.62 %
Current ratio Current Assets/ Current Liabilities 11.00 times
Liquidity ratio
Quick ratio (Quick Assets)/ Current Liabilities 6.71 times
Debt to equity ratio Long-term Liabilities / Total Equity 0.47 times
Solvency ratio

2.Compare the performance of Kimmer Ltd. between 2022 and 2021.

Ratio 2022 2021 2020

Total assets turnover (times) 1.22 1.36 1.65
Average inventory turnover period (days) 115.73 89 85
Efficiency ratio
Average settlement period for trade receivables (days) 97.14 83 80
Average settlement period for trade payables (days) 11.13 48.6 45
Net profit margin (%) 15 19.4 20.5
Gross profit margin (%) 33.87 35.7 36
Profitability ratio
ROA (%) 18.24 26.4 27
ROE (%) 28.61 41.2 40.4
Current ratio (times) 11 5.9 5.5
Liquidity ratio
Quick ratio (times) 6.71 4.1 4.2
Debt-to-equity ratio (times) 0.47 0.38 0.4
Solvency ratio

Efficiency ratio

The first is total assets turnover, this ratio decreased from 1.36 in 2021 to 1.22 in 2022, which
means that this ratio is worse, so that the business was less efficient at generating revenue from
its assets.
Second is the Average inventory turnover period. From 2021 to 2022, this ratio of businesses
increased sharply from 89 to 115.73 days. Longer inventory turnover means that a company's
goods tend to move more slowly, resulting in poorer operating efficiency and business’s
revenue.

Third is average settlement period for trade receivables, this ratio increased sharply from 83 to
97.14 in 2022. Collecting accounts receivable over a longer period of time negatively impacts
the company, leaving it with less time to pay its obligations, so the company needs to adopt an
aggressive collection policy to shorten that time frame.

Next is the Average settlement period for trade payables, this ratio in 2022 was 11.13, which
lower than 2021 4.36 times. This is a positive signal for businesses, Kimmer Ltd 's shorter
average payment period indicates that company's debt repayment ability was higher, besides
showing that Kimmer takes advantage of credit to meet short-term supply needs effectively.

Profitability ratio

With Net profit margin, this ratio decreased marginally by 4.4% to 15% in 2022. With Gross
profit margin, from 2021 to 2022, this ratio only decreased slightly from 35.7% to 33.87. Next is
ROA, this ratio was 26.4% in 2021 and drops sharply to 18.24% in 2022. Regarding ROE, this
ratio decreased sharply from 41.2% to 28.61% between 2021 and 2022.

In general, the profitability ratios of businesses in 2022 are lower than in 2021, which proves
that businesses operate less effectively in 2022, generating less profit from business's sales,
operations, assets, or shareholders' equity.

Liquidity ratio

With Current ratio, between 2021 and 2022, this ratio increased two times from 5.5 to 11 times.
In addition, with Quick ratio, this ratio increased slightly from 4.1 to 6.71 times between 2021
and 2022.

The liquidity ratios of business in 2022 is higher than in 2021, showing that business have the
ability to repay short-term debts and ensure a better balance between short-term assets and
short-term liabilities, helping them avoid risk of not being able to pay financial obligations
promptly.
Solvency ratio

Next is the Debt-to-equity ratio, this ratio in 2022 was slightly higher than 2021, with 0.47 and
0.38, respectively. This means that business use more debt to finance business activities, have
more difficulty repaying debt, and are under more financial pressure than in 2021. Last is the
Interest cover ratio, this ratio decreased sharply from 35 to 8.33 times between 2021 and 2022,
This ratio of the enterprise decreased sharply, showing that the company has less ability to
repay interest obligations, showing instability in the financial situation of the enterprise.

Ratio 2022 2021 2020 Industry average

Total assets turnover (times) 1.22 1.36 1.65 2
Average inventory turnover period (days) 115.73 89 85 60
Efficiency ratio
Average settlement period for trade receivables (days) 97.14 83 80 65
Average settlement period for trade payables (days) 11.13 48.6 45 45
Net profit margin (%) 15 19.4 20.5 20
Gross profit margin (%) 33.87 35.7 36 35
Profitability ratio
ROA (%) 18.24 26.4 27 27
ROE (%) 28.61 41.2 40.4 40
Liquidity ratio
Current ratio (times) 11 5.9 5.5 2
Quick ratio (times) 6.71 4.1 4.2 1
Debt-to-equity ratio (times) 0.47 0.38 0.4 0.5
Solvency ratio
Interest cover ratio (times) 8.33 35 30 25

3. Evaluate the performance of Kimmer Ltd. over time

With economic condition, the impact of the post-Covid-19 period caused many fluctuations for
the world economy in general and Vietnam's cement industry in particular (Xi măng Việt Nam,
2023). In 2022, the profits of cement manufacturing enterprises will continue to decrease due to
increased production costs. Cement production costs increased significantly due to increased
coal prices, but cement prices only increased slightly (5 - 10%) due to fierce competition and
weak consumption. Total cement consumption in the domestic market in 2022 will reach 62.68
million tons, nearly equivalent to 99.66% of 2021, while total exports in 2022 will only be 70% of
2021. 2021. (The Hoang, 2023)

Regarding Ratio Analysis, it helps evaluate several aspects of a company's operating and
financial performance such as company’s efficiency, liquidity, profitability, and solvency. The
trends of these ratios are analyzed to check if they are improving or worsening (Boigues, 2016).
Therefore, based on the cement industry’s economic situation and financial ratios can
demonstrate Kimmer Ltd’s overall financial health.

Efficiency ratio

The first is total assets turnover, this ratio gradually decreases over the years from 1.65 in 2020
to 1.36 in 2021 and 1.22 in 2022, but overall still lower than the industry average. Therefore, low
asset turnover shows that the company is not using assets effectively, or assets are damaged or
of poor quality, affecting the business's operations.

Second is the Average inventory turnover period. From 2020 to 2021, this ratio of businesses
increased slightly from 85 to 89, then increased sharply to 115.73 days in 2022, nearly double
the industry average. Kimmer Ltd's long inventory turnover period shows that the business
operates worse, earns less revenue than the average, and also incurs costs such as the
opportunity cost of tied capital. When assessing the amount of inventory to store, businesses
must consider factors such as demand, supply shortages and their perishability or obsolescence
for more effective management (McLaney and Atrill, 2017).

Thirdly, the average settlement period for trade receivables, this ratio in 2021 increases slightly
from 80 to 83, then increases sharply to 97.14 in 2022, which 32.14 days higher than the
industry average. With longer average settlement period, Kimmer Ltd's funds may be tied up
that could be used for more profitable purposes. (McLaney and Atrill, 2017)

Next is average settlement period for trade payables, this ratio increased slightly from 45 to 48
in 2021, but decreased sharply to 11.13 days in 2022, nearly 4 times smaller than the industry
average. Kimmer Ltd 's shorter average payment period indicates that company's debt
repayment ability was higher, but trade payables provide a free source of finance for the
business so longer period may be beneficial to the business than shorter period. (McLaney and
Atrill, 2017)

According to Boigues, efficiency ratios measure the company’s efficiency in generating

revenues by converting its production into cash, sales. Overall, through the efficiency ratios
analyzed above, the company is not really efficient in generating revenues, therefore leading to
the financial situation of the enterprise is worse than the general average.

Profitability ratio
With Net profit margin, this ratio gradually decreases over the years, from 2020 to 2021, it
decreased slightly from 20.5 to 19.4%, then decrease by 4.4% to 15% in 2022, 5% lower than
the industry average.

With Gross profit margin, this ratio only decreases slightly over 3 years starting from 2020, from
36% to 33.87% in 2022, 1.13% lower than the industry average .

Next is ROA, in 2020 this index is equal to the industry average of 27%, then decreases slightly
to 26.4 in 2021 and drops sharply to 18.24% in 2022.

Regarding ROE, this index increased slightly from 40.4 to 41.2 in 2021, but then decreased
sharply to 28.61% in 2022 that 11.39% lower than the industry average.

According to Boigues, Profitability ratio shows how effectively management uses resources to
make profits. Typically, a highly profitable position means a business has better overall financial
health and a better situation to increase production capacity. All profitability ratios of the
business are lower than the industry average, which shows that the company is using assets
inefficiently, damaged or used inappropriately, leading to the overall financial health of the
business worse than the general level.

Liquidity ratio

With Current ratio, this ratio in all 3 years is higher than the industry average. In three years
starting from 2020, this ratio increased sharply from 5.5 to 11, 5.5 times higher than the industry
average.

With Quick ratio, this ratio of the business is also higher than the industry average in all 3 years
2020, 2021 and 2022 with 4.2, 4.1 and 6.71 compared to 1, respectively.

The liquidity ratio measures the adequacy of current and current assets and helps assess a
business's ability to pay its short-term debts. (Boigues, 2016). Kimmer Ltd 's strong liquidity ratio
indicates that Kimmer has high ability to pay due debts. However, Kimmer Ltd 's liquidity ratios
are many times higher than the industry average, which does not necessarily reflect good
liquidity of the business because financial resources may not be used properly, or the inventory
is too large that when there are fluctuations in the market, the inventory cannot be sold and
converted into cash.

Solvency ratio
Next is the Debt-to-equity ratio, from 2020 to 2021, this ratio decreased slightly from 0.4 to 0.38,
then increase sharply to 0.47 in 2022, but still 0.03 times smaller than the industry average.

Last is the Interest cover ratio, in 2020 and 2021, this ratio is higher than the industry average,
30 times and 35 times compared to 25 times, respectively, but then dropped sharply to 8.33
times in 2022, which approximately 3 times lower than the industry average.

The solvency ratio measures the ability of a business to survive over a long period of time, meet
its long-term financial obligations (Boigues, 2016). With solvency ratios, D/E ratio in 2022 was a
little bit lower than the typical benchmark of the industry average. , which means that liabilities
account for a smaller proportion of total capital, so the company has less difficulty paying long-
term debt. However, the interest cover ratio was 8.33 times (smallest among 3 years and
industry average) showing that the interest burden of Kimmer Ltd enterprise is large, the
enterprise operates inefficiently, leading to only a low amount of profit available to meet interest
costs on debt, then there may be increasing cause for concern, cause negative effects on the
business strategy (Weetman, 2019).

-----

To conclude, based on the poor market economic situation and Kimmer Ltd’s financial ratios, it
shows that Kimmer Ltd operates less efficiently and the overall financial situation is worse than
previous years as well as the industry average.

4. Critically evaluate financial statements.

According to the financial report, the business's cash in 2022 is $13,000, down $4,000
compared to 2021 and only accounts for 16.8% of business assets. With trade receivables,
according to McLaney & Atrill, when businesses sell goods or services on credit, revenue will
usually be recorded before the customer pays the outstanding amount. Kimmer Ltd's financial
report shows that the business's trade receivable in 2022 is $34,000, $2,000 higher than 2021,
and accounts for a large proportion of the business's asset. Having high trade receivable always
poses a risk that customers will not pay the due amount over time, forming bad debts for
businesses, combined with few cash, making it difficult for payments, salaries payment and
investment of Kimmer Ltd.

With inventory, the business's inventory is quite large at $30,000, accounting for 39% of total
assets. Having a lot of inventory helps the business be more proactive, avoiding bottlenecks in
the production and sales process. Besides, there is also a reserve for unexpected bad business
situations: supply shortage, raw material price increase - typically in 2022, cement raw material
price increases by 5 - 10% due to fierce competition and weak consumption. (The Hoang,
2023). However, inventory storage is not always good. Storing too much inventory without
planning will cause certain costs: inventory storage or transportation fees, risk insurance costs,
space rental costs, and salaries for employees. labor, asset depreciation costs, etc. (Dao Ngoc
Thuy, 2016), therefore lower the business's net profit, ROA, ROE ratio, caused the business to
operate less efficiently and affected negatively the overall financial health of the Kimmer Ltd.

Finally, with non current liabilities, The 2022 financial report also shows that the business has
converted a limited debt of $5,000 into long-term debt, increasing long-term liabilities to
$30,000, while also increasing the debt-to-equity ratio of the business, this ratio tends to
increase meaning that the business is inefficient, needs to use more debt to finance business
activities and is becoming more dependent on debt.
 Scene 3

1. cash budget for the last quarter of 2023

Income statement
Cash budget October
255,000 Opening balance (10,000)
255,000 Cash receipts From cash sale 33,000
From credit sales 56,000
Total cash receipts 89,000
90,000
65,000 Cash payment Purchase 60,000
9,000 8,000
Wages
60,000 1,800
12,000 Overhead 5,000
236,000 Dividend
19,000 Capital expenditures
Rent 15,000
Total cash payment 89,800
Net cash flow (800)

2. Benefits, limitations of budgets, budgetary planning, bugetary control for DEPOT

According to Obi, Budget is a useful guiding tool for management in making future plans,
identifying specific Goals and Objectives that help the business operate without lack of direction.
Besides, the budget helps businesses expand their business in the future. Capital saved from
regular business expenditures can be put into a reserve account, ensuring that companies have
capital available when they need to make quick decisions to expand their business when the
opportunity arises.

Through budget planning, it enhances the quality of communication between employees within
the company: the top management communicates its expectations to lower-level managers to
assure all members of the company understand the expectations of the company and
coordinate their activities towards achieving the objectives (Obi, 2015).

Importantly, Budget assists managers in managing and controlling the activities for which they
are responsible through the budgetary control process: comparing budgeted plans and
standards to actual financial results, analyzing variances, and taking corrective action (Bedford,
2015). Therefore, DEPOT managers can identify costs that are not in accordance with the
original plan and thereby take the necessary corrective action.

In addition to the above advantages, the budget also has several limitations. Budgets provide
only approximate estimates, or because of changing circumstances, poor forecasting, or
general uncertainties in the business environment so that the results cannot be measured
accurately (Obi, 2015). In addition, A budget may be too rigid and may not allow for flexibility in
decision-making for unexpected changes in circumstances, this can lead to missed
opportunities or inefficient resource allocation (Obi, 2015). Not only that, planning and
controlling a budget can be time-consuming because it cannot remain static for too long and
must be revised, supplemented, or completely changed to suit changing circumstances (Obi,
2015). With Depot, they set budgets quarterly (specific for each month), this can cost the
business a lot of time and effort, but at the same time it also helps the company update and
provide regular information to help information users make suitable decisions.

3. Making corrective actions.

The Cash Budget for the last quarter of 2023 shows that there will be some problems in the
financial situation that DEPOT has to face. First, the company's net cash flow is negative in
October (-800) and December (-33800), and the company's closing balance was over drafted in
all 3 months with 10800$, 8600$ and 42400$. This happens because the business has poor
cash management, leading to negative cash flow, especially in the December the closing
balance exceeds the limit of overdraft, and because the business faces a chronic and prolonged
deficit, resulting in interest expense being huge with 15%* 61800/12= 772.5$ per month.
Therefore, the company must act to change the Cash Budget to limit the cost of large
expenditures and payments that will be disrupted based on the following specific solutions:

1.With total sales revenue, 30% of sales are for cash and the remainder are on credit terms
and collected in the following month.

Because the depot's revenue increased each month, 70% of the month's revenue is received in
the following month will increase the total sale revenue of each month in the last quarter.
 2. Second, capital expenditure will be paid at the beginning of the next quarter (January of next
year). This will help DEPOT reduce spending pressure in December.

3. Third, rent expense will be paid monthly than paid in advance every three months during the
first week of the quarter, and dividends will be paid equally in November and December (each
month is $10,000)

Spreading expenditure out to pay in each month will reduce spending pressure in December,
helping net cash flow not be negative and business not being overdrafted.

4. Justify budget control solutions and its impact on DEPOT’s decision making.

1.With total sales revenue, 30% of sales are for cash, the remainder of sales are on credit
terms and collected in the following month. Therefore, the business's total cash receipts in
October, November, and December will be $96000, $113000, and $126000.

15,000 Rent 5,000

Equity Total cash payment 79,800
85,000 Net cash flow 15,200
19,000 Closing balance 5,200
104,000

Second, capital expenditure will be paid at the beginning of the next quarter (January of next
year) and rent expense will be paid monthly than paid in advance every three months during
the first week of the quarter, therefore decrease the financial pressure on December and
October.
 Rent 5,000
Total cash payment 79,800
Net cash flow 16,200
Closing balance 6,200

Cash budget October

Opening balance (10,000)
Cash receipts From cash sale 33,000
From credit sales 63,000
Total cash receipts 96,000

Cash payment Purchase 60,000

8,000
Wages
1,800
Overhead 5,000

But after these adjustments, net cash flow in December is still negative, so dividends should be
paid equally in November and December (each month is 10000$) after it appears to decrease
the financial burden on December, help the business's cash flow not be negative, then meeting
the objectives: Helps businesses plan and manage cash budget more effectively, limiting
interest arising from overdrafts

Equity Total cash payment 79,800

85,000 Net cash flow 15,200
19,000 Closing balance 5,200
104,000
119,000
Cash budget October
Opening balance (10,000)
Cash receipts From cash sale 33,000
From credit sales 63,000
Total cash receipts 96,000

Cash payment Purchase 60,000

8,000
Wages
1,800
Overhead 5,000
Dividend
After editing, the business's cash was no longer as negative as before, making the business's
liquidity higher, helping the business increase its ability to pay short-term debt and ensure a
better balance between current assets and current liabilities, helping them avoid the risk of not
being able to promptly pay financial obligations. The new cash budget also shows that the
business's revenue has grown, and the business is not being over drafted anymore, which
limited interest expenses, thereby increasing the business's net income.

However, deferring capital expenditure payments in December will increase the business's
liabilities, and this could have a direct negative impact on Depot's credit worthiness and DEPOT
likely to incur fines because of late repayment from creditors.
Conclusion
In summary, the essay has discussed and evaluated the factors affecting the performance of an
organization and the success of the organization through finance, pointing out the advantages
and disadvantages of budget, budgetary planning and control, thereby showing the important
role of accounting for corporations in general, as well as small business organizations in the
essay in particular.
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AND PROFITABILITY RATIOS IN THE U.S. RETAIL INDUSTRY. Morehead
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