3-1 Final Project Milestone One PDF

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3-1 Final Project Milestone One Gabriella Vidaurri Southern New Hampshire University

3-1 Final Project Milestone One In this case study, a management analysis is reported for Peyton Approved Company. The year 2017 was financially profitable, however, from a managerial point of view there are decreases in the ratio analysis. The report determines the return on equity and assets have decreased from 2016 to 2017. This analysis will focus on the current and quick ratio, account receivable and inventory turnover, gross margin, return on sales, equity, and assets for evaluating the operation and financial performance of Peyton Approved. The computations for each analysis will specify the Peyton Approved Company holds a solid and stable business. First, the current ratio (working capital) is calculated by dividing current assets by current liabilities. Second, the quick ratio was determined by dividing quick assets by current liabilities. Quick assets are considered cash, marketable securities, or accounts receivables (Wahlen et al., 2017). The report determined a quick ratio of 4.89 for 2017, which results the company’s ability to meet short-term operating needs by using its liquid assets. The accounts receivable turnover ratio is an indicator of how efficiently the company collects its receivables and converts them back to cash (Wahlen et al., 2017). The receivable turnover is calculated by taking the total credit sales and dividing it by the average accounts receivable. In result, the receivable turnover ratio resulted as 5.91. Inventory turnover ratio indicates the average number of times the inventory sold during that period (Wahlen et al., 2017). This ratio has a two-step process: First, add the beginning inventory to the previous year’s ending inventory and divide by two. Second, divide the average by the cost of goods sold to find the ratio. The final calculations for the inventory turnover ratio resulted as 7.61. Next, the gross margin measures the company’s profitability by dividing the gross profit

from the total revenue. The final gross margin was up 2% from 2016 at 68%. Peyton Approved Company’s return on sales was calculated by their net income divided by total revenue, resulting in a total of 53%. The return on equity measures the profitability of the company relative to the amount of equity capital invested by the common shareholders (Wahlen et al., 2017). The return on equity was calculated by dividing the company’s net income by the shareholder’s equity. The final calculations determined the return on equity is at 125%. Lastly, the return on assets were determined by dividing the net income by total assets. In result, the return on assets was 101%. Table 1 Comparison Ratios 2017 Current Ratio (Working Capital) Quick Ratio A/R Turnover Inventory Turnover Gross margin Return on Sales Return on Equity Return on Assets

2016 5.78 4.89 5.91 7.61 68% 53% 125% 101%

5.18 4.60 5.04 8.81 66% 52% 161% 109%

The ratio analysis in Table 1 determines a comparison of the trends from 2016 to 2017. Peyton Approved Company’s inventory turnover ratio decreased by 1.21, which means the company is holding inventory longer than the previous year. One option to stabilize the ratio is to keep an adequate supply of inventory on hand to meet the customer’s demands and examining the relative ratio of costs of goods sold compared to sales. See below an example from 7-2b in Intermediate Accounting: Between 2013 and 2014, Starbucks's inventory turnover increased from 5.43 to 6.23,

while its cost of goods sold to sales ratio decreased from 54.1% to 52.8%. This is consistent with increased demand for Starbucks's products (e.g., comparable store sales were up 6% during the year) coupled with supply chain improvements that led to lower inventory costs (Wahlen et al., 2017). The return on equity dropped a substantial amount by 36% from 2016. The declining result of return on equity determines Peyton Approved Company is becoming less efficient at creating profits and increasing shareholder’s equity. The company will need to use more financial leverage, increase profit margins, improve asset turnover, and etc. Return on assets also decreased by 8% from 2016 to 2017. This can be increased in the year of 2018 by using Peyton Approved Company’s assets to increased net income, decrease total assets, improve the efficient of current and fixed assets. The most profitable categories in 2017 are the accounts receivable turnover and current ratio compared to 2016. Lastly, the consistent categories determined are quick ratio, gross margin, and return on sales. Peyton Approved Company can achieve a higher ratio analysis for the year of 2018 by taking this feedback and implementing it for next year. There are effects of different compounding periods and interest rates for the future of Peyton Approved. Compounding is the conversion of current-period cash flow to future value (Wahlen et al., 2017). If funds are able to sit in a compounding period with the interest rates increasing, this could result in a larger return on funds. According to Wahlen et al., (2017), interest rates can increase the future value of money because it increases profits for the borrower. If Peyton Approved Company can increase their return on compound interests from investments or accounts receivable, then the company can increase their profits and return on equity. However, the result of a different compounding period may result in a decrease on return of funds.

In conclusion, the ratio analyses report delivers a computational view for a better understanding of the financial results and trends over a period of time. This report provides key indicators of Peyton’s Approved organizational performance. The data displays there is opportunities to improve for inventory turnover, return on sales, return on equity, and return on assets. However, the quick ratio report surpasses the result in 2016, but should still consider mitigating excess current assets. The company will need to show an increasing improvement from the year of 2016. The ratio analyses report indicates Peyton’s Approved Company is a steady business with room for improvement.

Reference Wahlen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate accounting: Reporting and analysis (2nd ed.). Boston, MA: Cengage Learning....