7c - written assignment (BUS5110, AY2021-T1) PDF

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Fashion Forward versus Dream Designs BUS 5110 (Managerial Accounting) AY2021-T1 Dr. Peggy January 19 October, 2020

Fashion Forward versus Dream Designs

Fashion Forward versus Dream Designs The accounting department has been tasked with evaluating two companies for investment info by our parent company. The two companies in question are Fashion Forward and Dream Designs. The accounting department was asked to compute: 1) profit margin ration; 2) return on assets; 3) current ratio; 4) quick ratio; 5) AR turnover ratio; 6) average collection period; 7) inventory turnover ratio; 8) average sales period; and 9) debt to equity ratio. After computing the given rations, the accounting department has been asked to evaluate the results and explain as well as compare and contrast the companies. Finally, the accounting department has been asked to recommend which company we should pursue. To begin, Profit Margin Ratio is computed as Net Income divided by Total Revenue. (Kennan, n.d.). Profit Margin Ratio shows how much profit sales can generate. For Fashion Forward, this is 1 36,500 / 250,0000 = 5.46%. For Dream Designs, this is 212500 / 5400000 = 3.94%. Fashion Forward’s PM Ratio appears to be the best. Next, Return on Assets is computed as Net Income divided by Average Total Assets. This ratio shows how efficiently assets are used. (Boyte-White, 2020). Fashion Forward is computed as 136,500 / ((27,470,000 + 28,050,000) / 2) → 136,500 / 2,776,000 = 4.92%. To explain, this means for every dollar in assets, Fashion Forward earned $0.0492. For Dream Designs, this is computed as 212,500 / ((4,381,250 + 4,450,000) / 2) → 212,500 / 4,415,625 = 4.81%. To explain, this means for every dollar in assets, Fashion Forward earned $0.0481 While the difference is negligible, Fashion Forward is leading in this ratio as well.

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The third computed ratio is Current Ratio, which is Current Assets / Current Liabilities. This ratio shows how effectively the current assets can be used to pay off the current liabilities. For Fashion Forward, this is computed as 1,297,000 / 1,170,000 = 1.11. For Dream Designs, this is computed as 2,280,500 / 1,625,750 = 1.40. Dream Designs leads in this ratio and appears to be managing current liabilities better than Fashion Forward. The fourth ratio evaluated was the Quick Ratio, which is the ratio of liquid assets to liabilities. For Fashion Forward, this is computed as (950,000 + 200,000) / 1170000 = 0.983. For Dream Designs, this is computed as (1,710000 + 250,000) / 1,625,750 = 1.21. Dream Designs also appears to be managing their liquidity position better than Fashion Forward. Ratio #5 is the Accounts Receivable Turnover Ratio, which is equal to Credit Sales divided by the Average Accounts Receivable. For Fashion Forward, this is computed as 2,000,000 / ((200,000 + 150,000) / 2) → 2,000,000/ 175,000 = 11.43. For Dream Designs, this is computed as 4,320,000 / ((250,000 + 275,000) / 2) → 4,320,000 / 262,500 = 16.46. Dream Designs is also managing their debtors in a better manner than Fashion Forward. The next ratio (#6) calculated was Average Collection Period, which is computed by dividing the Accounts Receivable Turnover Ratio into 365 (days per year). This ratio shows how fast debtors are being converted into cash. (Carlson, 2020). For Fashion Forward, this was computed as 365 / 11.43 = 31.93 Days. For Dream Designs, it is computed as 365 / 16.46 = 22.17 Days. In this ratio, Dream Designs converted debtors into cash more rapidly than did Fashion Forward.

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The Inventory Turnover Ratio is next. This is computed as Cost of Sales / Average Inventory. For Fashion Forward, this was computed as 1,400,000 / ((112,000 + 105,000) / 2) → 1,400,000 / 108,500 = 12.90. For Dream Designs, this was calculated as 3,250,000 / ((200000 + 215000 ) / 2) → 3,250,000 / 207,500 = 15.66. Dream Designs is managing their inventory better than Fashion Forward. The Average Sales Period shows how fast inventory is sold. Average Sales Period is computed by dividing the Inventory Turnover Ratio into 365 (days per year). For Fashion Forward, this is expressed as 365 / 12.90 = 28.29 days. For Dream Designs, it is expressed as 365 / 15.66 = 23.31 days. Dream Designs is selling their inventory faster than Fashion Forward sells theirs. The last ratio computed is the Debt to Equity Ratio, which shows the percentage of debt to equity. DE Ratio is computed by taking Total Liabilities and dividing it by Total Equity. (Hayes, 2020). For Fashion Forward, this is computed as 1,345,000 / 1,402,000 = 0.959. For Dream Designs, it is computed as 1,901,250 / 2,480,000 = 0.767. Fashion Forward’s Debt to Equity Ratio is higher, which makes that company a higher risk company in which to invest. The summary of all this data points to Dream Designs as the logical choice to pursue, as Fashion Forward’s ratios, in several key computations, are higher or less favorable than Dream Designs. In fact, the only two computations where Fashion Forward showed more favorable calculations were Profit Margin Ratio (5.46% versus 3.94%) and Return on Assets (4.92% versus 4.81%).

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REFERENCES: Boyte-White, C. (2020, October 7). How to calculate return on assets (ROA) with examples . Investopedia. https://www.investopedia.com/ask/answers/031215/what-formula-calculating-return-asse ts-roa.asp Carlson, R. (2020, July 14). What is the average collection period ratio?  The Balance Small Business. https://www.thebalancesmb.com/average-collection-period-ratio-393191 Hayes, A. (2020, April 27). Debt-to-Equity ratio – D/E . Investopedia. https://www.investopedia.com/terms/d/debtequityratio.asp Kennan, M. (n.d.). How to find a profit margin ratio. Small Business - Chron.com. https://smallbusiness.chron.com/profit-margin-ratio-11951.html...