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    The document summarizes an accounting project analyzing the financial statements of Highland Malt. It includes: 1) Assumptions made in preparing the financial statements, such as applying accrual accounting and absorption costing. 2) A calculation and analysis of financial ratios in 2018 and 2019 to assess Highland Malt's financial health and liquidity. 3) Recommendations that Highland Malt reduce operating costs to improve profitability, and invest cash in interest-bearing assets.

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    The document summarizes an accounting project analyzing the financial statements of Highland Malt. It includes: 1) Assumptions made in preparing the financial statements, such as applying accrual accounting and absorption costing. 2) A calculation and analysis of financial ratios in 2018 and 2019 to assess Highland Malt's financial health and liquidity. 3) Recommendations that Highland Malt reduce operating costs to improve profitability, and invest cash in interest-bearing assets.

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    96 views4 pages

    Accounting Project - EMBA Cohort 43 Group33 - FinalSubmission

    Uploaded by

    odlivingston
    The document summarizes an accounting project analyzing the financial statements of Highland Malt. It includes: 1) Assumptions made in preparing the financial statements, such as applying accrual accounting and absorption costing. 2) A calculation and analysis of financial ratios in 2018 and 2019 to assess Highland Malt's financial health and liquidity. 3) Recommendations that Highland Malt reduce operating costs to improve profitability, and invest cash in interest-bearing assets.

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    of 4

    Accounting Project

    E/MBA Class
    of May 2023
    Group #33
    Ronke Aramide Adenle [email protected]

    Julia Baum [email protected]

    Livingston Daniel Okphakalu [email protected]

    © 2021 Pedago, LLC. All rights reserved. 6/24/21


    Accounting Project

    Discussion - Highland Malt: Accounting Policy Choices in Financial Statements

    1) Assumptions
    The financial statements of Highland Malt have been prepared under the following assumptions
    identified by our group (additional to the ones listed in the project prompt):
    - Accrual Accounting is applied, Financial Accounting is applied;
    - Matching Principle is applied, Absorption Costing is applied;
    - Factory Lease and Shipment/Equipment Lease are treated as operating leases;
    - Principal of Bank Loan will be paid back in full on 1st January 2020.

    2) Analysis of Financial Health


    The following ratios have been calculated to assess the firm’s financial health:
    Name 2018 2019
    1. Current Ratio - 20.7
    2. Quick Ratio - 13.2
    3. Debt-to-Equity (DE) 0.066 -
    4. Debt-to-Assets (DA) 0.063 -
    5. Operating Margin - 0.022
    6. Net Margin - 0.02
    7. Return on Equity (ROE) -0.0066 0.048
    8. Return on Assets (ROA) -0.0063 0.048

    3) Recommendations
    a) Liquidity and Solvency
    Assessing the Current Ratio and Quick Ratio, we conclude that Highland Malt was not liquid in
    2018 due to only producing inventory without selling, yet highly liquid in 2019. The company
    was able to meet its short-term obligations in 2019. Yet, Highland Malt held a lot of liquid assets
    (cash) in 2019 and we suggest that the company should make better use of its cash by investing,
    for example into bonds which are easily tradeable if the need arises, hence earning interest.
    Debt-to-Equity and Debt-to-Assets in 2018 were both low which indicates that the company was
    neither operating nor financed on debts.

    b) Efficiency and Profitability


    In 2019, both the Operating Margin and Net Margin were low. We conclude that the overall
    operating costs of Highland Malt were too high, the company did not operate efficiently and was
    not very profitable. We suggest that the company should reduce overall operating costs where
    possible.
    In 2018, Highland Malt did not use its funds effectively and was not profitable as indicated by
    the negative ratios of Return on Equity and Return on Assets. In comparison, 2019 was a more
    effective and profitable year for the company although the ratios were still low.

    © 2021 Pedago, LLC. All rights reserved. 8/2/21 2


    Accounting Project

    APPENDIX

    A) Calculation of key entries in balance sheet and financial statements: Highland Malt

    1) 2018
    Cash = $750,000 + $50,000 - $5,000 - $300,000 - $325,000
    Inventory = $300,000 + $325,000
    Retained Earnings = $0
    Sales Revenues = $0
    COGS = $0
    Operating Expenses = $0

    2) 2019
    Cash = $ 2,500,000 - $50,000 - $5,000 - $50,000 - $90,000 - $50,000 - $75,000 - $250,000 -
    $1,450,000
    Inventory = $ 700,000 + $750,000 -$300,000 - $325,000 - $700,000 - $375,000
    Retained Earnings = $2,500,000 - $1,700,000 - $390,000 - $355,000
    Sales Revenues = $ 2,400,000 + $100,000
    COGS = $300,000 + $325,000 + $700,000 + $375,000
    Operating Expenses = $ 90,000 + $50,000 + $250,000
    SG&A = $230,000 + $75,000 + $50,000

    B) Multi-Year Balance Sheet: Highland Malt


    Account As of 31st December 2018 As of 31st December 2019
    Current Assets
    Cash $170,000 $550,000
    Inventory $625,000 $375,000
    Accounts Receivable $0 $100,000
    Interest Expense $5,000 $10,000
    Total Assets: $800,000 $1,035,000

    Current Liabilities
    Bank Loan Payable $0 ($50,000)
    Long-Term Liabilities
    Bank Loan Payable $50,000 $0
    Total Liabilities: $50,000 ($50,000)

    Equity
    Paid-in Capital $750,000 $750,000
    Director’s Loan $0 $230,000
    Retained Earnings $0 $55,000
    Total Equity: $750,000 $1,035,000

    Total Liabilities & Equity: $800,000 $1,035,000

    © 2021 Pedago, LLC. All rights reserved. 8/2/21 3


    Accounting Project

    C) Multi-Year Income Statement: Highland Malt


    Account For period ending For period ending
    31st December 2018 31st December 2019
    Revenue $0 $2,500,000
    COGS $0 $1,700,000
    Gross Profit: $0 $800,000
    Operating Expenses $0 $390,000
    SG&A $0 $355,000
    EBI: $0 $55,000
    Interest Expense $5,000 $5,000
    Net Income (Loss): ($5,000) $50,000

    D) Multi-Year Cash Flow Statement: Highland Malt


    Account For period ending For period ending
    31st December 2018 31st December 2019
    Net Income ($5000) $50,000
    Change in Inventory ($625,000) $250,000
    Accounts receivable $0 ($100,000)
    Total Operating Cash Flows: ($630,000) $200,000

    Purchase of PP&E $0 $0
    Total Investing Cash Flows: $0 $0

    Increase in Paid-in Capital $750,000 $0


    Increase in Bank Loan Payable $50,000 ($50,000)
    Increase in Director’s Loan $0 $230,000
    Total Financing Cash Flows: $800,000 $180,000

    Total Cash Flows: ($170,000) $380,000


    Beginning Cash Flows: $0 $170,000
    Ending Cash Flows: ($170,000) $550,000

    E) Calculation of ratios:

    Current Ratio = Current Assets / Current Liabilities


    Quick Ratio = Current Assets – Inventory / Current Liabilities
    Debt-to-Equity (DE) = Liabilities / Equity
    Debt-to-Assets (DA) = Liabilities / Assets
    Operating Margin = Operating Profit / Revenue
    Net Margin = Net Income / Revenue
    Return on Equity (ROE) = Net Income / Equity
    Return on Assets (ROA) = Net Income / Assets

    © 2021 Pedago, LLC. All rights reserved. 8/2/21 4

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