It is always important to have both company background information, and the aid of other analyses such as ratios to help form a complete picture. Income Statement Revenue Sections: From the income statement one of the most visible changes is both strength and a weakness. The jump in Net Sales from FY6 to FY7 (up 33%) is very substantial indicating a growth year for the company and a very positive result. Net sales are also a source of weakness when we look at the substantial drop in sales from FY7 to FY8, where a 15% reduction took place. Normally this may be cause for alarm and should mandate some immediate action.
According to management, because their product is dependent on professional riders obtaining sponsors, the downturned economy has cause several sponsors to stop funding riders, and thus affected sales. This in itself could indicate that there isn’t enough diversification in the company’s revenue sources. Although a niche industry obtains most of its profit from its specialization, it should not depend on it as a sole source of revenue. The company is also dependent on its innovation and market leadership to maintain brand value, so special attention must be given to R&D and advertising funding.
A strengthin this section is that COGS has been moving in proportion to sales. Although there is a small margin of difference between the raise/fall of sales versus COGS (1. 5% from FY6 to FY7 and . 5% from FY7 to FY8) the proportions do indicate that the projections being made in purchasing are accurate. However, that gap is also an opportunity to increase profit by reducing COGS. Selling Expenses: A strength that can be observed here is that the company increased advertising from FY6 to FY7 by 37. 5%. This is especially positive because the product depends on visibility and brand name recognition by professional riders.
The Business plan on Royal Dutch Shell Company Profile
The objectives of Royal Dutch Shell are to achieve efficiency, responsibility and profitability in oil, gas and other related businesses and to take part in research activities and developments of new sources of energy to meet the world’s demand for energy. They believe oil and gas will be important to meet that demand for energy for years to come, and most of their investments are directed to oil ...
There are a few weaknesses in this section as well, mostly from FY7 to FY8. First, there was a decrease in both advertising of 16. 3 percent. As stated in the previous paragraph, one of the company’s main assets is its brand, which represents innovation and quality professional bicycles. However, a brand name must be supported by advertising. Sales are almost always affected by reduction in advertising. Without it new customers won’t know about the company’s products, and existing customers won’t know about innovations and new products. We recommend that advertising funding be increased in support of sales.
Another potential weakness is the inactivity in the Website Creation and Maintenance section. This may indicate that the company’s website is not being used as an active marketing and sales asset. In today’s market, the website can help the company to diversify its revenue streams and seek out new business opportunities that can help combat sales declines from its niche market. We recommend increasing this allotment in support of sales and to help the company mitigate the risk related to niche market sales. A strength of this area is that most accounts fluctuated up and down in proportion to the fluctuation of net sales.
This indicates that there is good control in selling expenses. 2 General and Administrative Expenses: This is by far the most significant source of concern in the Income Statement. A significant weakness of this area is the rise in expenses of 20. 4 percent from FY6 to FY7, and then another rise of 1. 2 percent from FY7 to FY8. The latter is especially concerning because it took place during a low net sales year. Overall, this indicates that expenses need to be controlled more rigorously. We recommend that the company institute quarterly budget and spending sessions to adjust expenses according to sales performance.
The Term Paper on Company Law Section 14 Of The Companies Act 1985
The Joint Stock Companies Act 1844, which enabled companies to be formed by “deed of settlement” and the Limited Liability Act 1855, established a general incorporation procedure which offered limited liability to shareholders and gave recognition to the company as a separate legal persona. By the Joint Stock Companies Act 1856, the deed was replaced with today’s style of ...
This allows for finer control when there is a downward trend in sales. From the entire section we can point out several contributing factors. First, there was a substantial payroll expense rise (21. 4% administrative salaries and 29. 4% executive compensation) that took place from FY6 to FY7. We suspect that the increase in salaries was due to the growth seen by the company. We recommend that a formal compensation plan be enacted which conditions raises based on previous year sales revenue performance, and which spreads out the increase in small yearly increments. We are also concerned about the 16. percent decrease in research and development from FY7 to FY8. The type of product and the type of market both require steady innovation, which comes from funding R&D. This reduction can have serious long term effects on product sales, and thus we recommend increased funding in support of product quality and long term sales. A final weakness in this section is the continual and disproportional growth of the Other G&A Expenses section across all years. It is growing faster than the other expenses in the section. This suggests that management should exercise tighter controls over miscellaneous expenses.
We recommend that the company review the contents of the accounts in this section and consider reducing these expenses in proportion to sales (see overall recommendation above).
Both Total Operating Expenses and Operating Income show the overall weakness of the company in controlling its General and Administrative Expenses. If the company would have exercised better control in this area, its G&A Expenses should have fallen from FY7 to FY8 in proportion to net sales, by about 15% or about $138,617 which would have reduced the operating loss from 69% to 25%. Net earnings show the company’s downward trend.
Although earnings surged during the growth year, they did not maintain on the following year and the decrease puts the company in a worse off net earnings position in FY8 than where they were in FY6. Again, we can’t stress enough that the company should diversity its revenue sources outside its niche market; invest in advertising to support sales; invest in R&D to maintain market positioning; institute a compensation plan that spreads out salary increases; and exercise tighter expense controls in its General and Administrative expenses areas including quarterly budget and expense reviews.
The Term Paper on Supervisory Board Company Sale Members
Draft 12 March, 2003 "INTEROIL" LIMITED LIABILITY COMPANY SREBRENIK ARTICLES OF ASSOCIATION March 2003 On the basis of Article 317 of the Law on Commercial Companies (Official Gazette of the Federation of Bosnia and Herzegovina 23/99) (hereinafter: the Law) and in accordance with the Share Sale and Purchase Agreement concluded between Hasan Sarajliae and OMV Istrabenz Holding on 20 th December, ...
Balance Sheet Cash and Cash Equivalents: A weakness in this area is the reduction of 54. 6 percent in Cash from FY6 to FY7 in spite of the net sales increase of 33%. This can indicate that most sales were made on account and remained uncollected. This can also indicate that cash was used to pay for expenses. Another factor that may have influenced this reduction was the Capital Stock purchase from FY6 to FY7 for $100,000. We recommend that the company utilize more debt to pay for expenses instead of using cash. This account also increased by 275. 4 percent from FY7 to FY8.
This can be seen as a strength, and was directly influenced by the 15% increase in receivables collection and the increase in payables debt. This suggests that the company has begun to use debt instead of cash to pay for expenses and that it has begun to increase its collection efforts. 3 Accounts Receivable: A substantial increase (164. 3% from FY6 to FY7) can be seen as weakness due to the company’s inefficiency in collection of outstanding accounts. The company extends net 30 terms to its clients, but is failing to collect on these terms, causing the large increase in receivables at the end of the period.
We recommend that the company increase its collection efforts on past due accounts. This can be done by maintaining good communication with clients, sending monthly statements which include balance aging, and by setting stricter terms on those clients that do not pay on time. A drop of 15 percent in receivables from FY7 to FY8 is a strength for the company. The company still sold over 5 million in this period, and a it collected over $105,000 on outstanding accounts, contributing to its cash position. Total Current Assets: An increase of 16. percent in total current assets from FY7 to FY8 in spite of weaker net sales (down 15%) is a definite strength. This increase can be attributed to improvements in cash and increase collections of receivables. Accounts and Notes Payallip! A very positive trend that can be categorized as a strength is the increase of accounts payables across all years. This means that the company is starting to leverage its debt to finance its assets. Although this is not normally a good thing, the company’s current ratio (over 5) indicates that it has maintained a very low proportion of current assets vs. urrent liabilities and that there is room to both improve cash liquidity and still maintain a good ration (above 1. 5).
The Essay on Can Companies Use Mentoring to Increase Employee Retention?
All businesses, from an entrepreneurial start up to an established company, need mentoring. The entrepreneurs of those companies require mentoring as well. A mentor can help a fellow peer develop important business skills, support them in making important career and life decisions and put them in touch with needed network contacts. The purpose of my report is to analyze the results of putting a ...
This is also reflected in the steady increase of Total Current Liabilities across all years. Overall the rate of growth for assets is still greater than the rate of growth for liabilities. Stockholder’s Equity: There are two significant strengths in this area. The first is the continued increase in retained earnings. Even in a bad sales year the company has managed to support its operations with internally generated revenues.
The company will not need to issue any more stock to raise operating capital. The second strength is the rising trend in Total Stockholder’s equity. This means that the current investors can potentially see better dividends. This also adds value to the stock by making the company seem more attractive to potential investors. Vertical Analysis Vertical Analysis is also a type of trend analysis but it sees changes differently from a horizontal analysis. The main focus of horizontal analysis is passage of time, where the focus of vertical analysis is the distribution of money within a period.
In a vertical analysis we take a key amount (net sales in income statement and total assets/liabilities in balance sheets) as the base and calculate what percentage each amount constitutes within the base amount. This way we can see where the money is being spent or earned within a period, and we can calculate changes in these allocations from one year to the other. Income Statement 4 Revenue: The revenue section shows two important strengths. The first is that gross profit shows an upward trend from FY6 (26. 6%) to FY7 (27. 4%) and FY8 (27%).
This is especially significant in FY8 because of the decline in net sales from FY7 to FY8 (see horizontal analysis of income statement, net sales).
The Business plan on Company G’s Three Year Marketing Plan Marketing plan
Company G’s develops electronic appliances based on current technology. The marketing plans exemplify the strategies employed and market segment to assign new consumers and create solid financial benefits while retaining the existing customers. G’s Company is a unique electronic appliance developer which gives an advantage over the competitors by exposing he customers to a new outlet of electronic ...
Another strength in this area is that COGS has remained steady across all three years in proportion to net sales. This adds stability to the company and helps it produce accurate budget estimates. The ratio of COGS to net sales seems high (73 cents of COGS per net sales dollar) but we have to remember that the company’s product is both skilled labor intensive and requires high quality (expensive) materials. Selling Expenses:
A strength in this area is that selling expenses are both steady across all years and proportionally small (6. 7% of net sales).
This may also indicate that the company has a very efficient sales, distribution, and transportation operation which allow it to control its costs and keep them steady. General and Administrative Expenses: This area continues to be the biggest source for concern for the company. A substantial weakness is the upward trend from FY7 to FY8 (in spite of the sales decline).
A total 18. 4 cents of every net sales dollar were spent in FY8 in G&A Expenses.
Overall, these types of expenses are three times higher than selling expenses in all years. When looked at closely, we are even more concerned to learn that the Other G&A Expenses are as much as 3. 3 cents of every net sales dollar. This is as much as administrative salaries and even more than utilities in FY8. We recommend that rigorous expense controls be implanted to combat raising G&A Expenses, including quarterly budget and expense reviews. Operating Income. EBIT, and Net Earnings All three of these areas show a downward trend indicating.
The cause for these weaknesses is mainly due to high expenses, which compounded by a bad sales year in FY8. Of the little profit that is left, most of the Earnings Before Income Taxes (EBIT) are used to pay for the high interest expenses. We recommend the implementation of expense controls outlined above and consideration of accelerated payment on the company’s long term payables (mainly mortgage payable) to reduce interest expenses. Balance Sheet Cash and Cash Equivalents: This area shows an important area of strength for the company in the 10. 3% of cash that makes up total assets in FY8.
This high percentage of cash available to the company improves its liquidity and its credit capabilities. This strength can be attributed to collections of strong sales in FY7 and to good collection activity for FY8. Accounts Receivable: A weakness in this area is the high amount of accounts receivables that make up assets. A total 16. 6 cents in FY7 and 14. 1 cents of every asset dollar is owed to the company through its receivables. The amount is not excessively high but it can be improved. We suggestthat the company increase its collection efforts on past due accounts.
The Term Paper on Ford Motor Company Ratio Turnover Equity
... net sales divided by their average total assets. This ratio demonstrates the efficiency of assets used in producing sales. Company like Ford Motor Company ... the figures indicating negative working capital. Current Ratio & Quick Ratio The current ratio in the years 1991-1995 has ... Ford steadily increased it's sales while it lowered it's expenses and it's cost of sales. This directly increased ...
This can be done by maintaining good communication with clients, sending monthly statements which include balance aging, and by setting stricter terms on those clients that do not pay on time. 5 Raw Materials Inventory and Work in Progress Inventory Although the business does not maintain any finished product in its inventory, it does need to purchase and inventory raw materials for production. A weakness can be observed in the high amounts of raw materials (2. 1% for FY7 and FY8) and work in progress inventory (3% for FY7 an FY8).
This may point to a deficiency in the monthly purchasing of raw material.
We recommend a review of the purchasing and inventory areas so that current material levels are contemplated in future material purchases. This should lower inventory levels and increase the bottom line. Total Current Assets Some very important strengths in this area are the upward trend in total current assets from FY7 to FY8 and the high proportion of current assets to total current assets (37. 2% of all assets are current assets).
This helps the company maintain a high working capital and helps it maintain very good current and acid test ratio scores, thereby making it more attractive to outside investors and creditors.
Current Liabilities: A very strong aspect of the company is its low amount of current liabilities. Although this figure is trending up (FY6 2. 5%, FY7 5. 4%, and FY8 7%) the amount is very low. Most of the company’s liabilities are made up of long term assets (land, buildings, equipment).
This helps the company maintain very good liquidity ratios and helps it obtain favorable credit and financing terms with vendors and lenders. Total Current Liabilities: This area is also a strength as total current liabilities are trending down from FY6 (47. %) to FY7 (46. 7%) and to FY8 (45. 9%).
This is mainly due to the fact that the mortgage payment is relieving more debt than the company is incurring it through payables. Retained Earnings: The total amount of retained earnings during FY8 constituted 28. 1% of every equity dollar and it is considered a very important strength for the company. We can say that the company’s operations are being successfully funded through retained earnings and that the company will not need to issue additional stock to continue funding them. Trend Analysis The trend analysis provided has a substantial weakness in that the Net Sales and Net Earnings trend results for FY6, FY7 and FY8 do not show the same pattern as the projected sales for FY9 through FY11. Table 1- Current Performance Competition Bikes, Inc. Historical Trend Analysis December 31, Years 6-8 Year 8Year 7Year 6 Units Sold340040003000 Net Sales5,083,0005,980,0004,485,000 Net Earnings36,100196,29447,479 Trend Percentages113. 3%133. 3%100. 0% Net Earnings Pct76. 0%413. 4%100. 0%
As we can see from the table units sold increased by 13% from FY6 to FY8, but net earnings fell by 24 percent comparing the same years. Table 2 – Performance Forecast Competition Bikes, Inc. Forecasted Trend Analysis with Year 8 as base year December 31, Years 9, 10, & 11 Year 11Year 10Year 9Year 8 Projected Units Sold380036603510 Net Sales5,681,0005,471,7005,247,4505,083,000 Trend Percentages111. 8%107. 6%103. 2%100. 0% Increase Over Prey. Year4. 24. 43. 2 From looking at the sales forecast we can see that the projections do not reflect past performance trends for FY6 to FY8.
There is also the concern about the cause for the decrease in sales from FY7 to FY8. If the economy caused sales to retract 15 percent in one year, and if the revenue sources for the company are professional riders who depend on sponsors to purchase the company’s product, it is unlikely that the market can overcome this 15% downward trend and add an additional 3 to 4% upward trend in net sales. To strengthen this area we recommend that the company review the sales projections and that it bases them in both past sales performance and competitor/market segment performance.
Another recommendation to improve this area is to increase funding in advertising, R&D, and website creation and maintenance. These three areas can help strengthen sales for the short and long term. 7 Ratio Analysis: Ratios in its most basic form are formulas used in financial analysis to evaluate the proportion of one amount to another amount within a financial statement. Rations can be used to evaluate performance, liquidity, debt, creditworthiness, collection performance, payment performance, inventory efficiency, among many others. Current Ratio — Strength A current ratio of 5. 5 in FY8 considered a strength for the company. This means that the company has $5. 35 of current assets for every dollar of liabilities. A figure of 1. 5 is considered good, and in comparison with its competition, Two Wheel Racing, it is also superior (4. 2 in FY8).
The high score can be attributed to the shrinking liabilities and to continued growth in current assets. This high ratio allows the company to seem better performing in comparison to its competition (in the eyes of investors) and allows the company to acquire financing more easily by appearing a safer lending risk (in the eyes of lenders).
The ratio does however suggest that the company has room to put more assets to work towards its operations and still have a significantly good current ratio. Acid-Test Ratio — Strength This more stringent measure of liquidity is also a strength for the company. Its current score of 4. 25 in FY8 is substantially higher that the manufacturing norm of 1. 0 and still higher than its direct competition (Two Wheel Racing, 3. 4 in FY8).
As is the case in the current ratio this ratio score helps the company in investment and financing. This ratio is closely related to the current ratio because the company does not maintain a inished goods inventory, and because its raw materials and ‘in-progress’ inventories are relatively small. Collection Period – Weakness An average collection period of 48 days for FY8 indicates that most of the company’s customers are complying with the sale terms as agreed. In contrast the competition (Two Wheel Racing, FY8) had only an average collection period of 32. 5 days. This shows that the company is not collecting on its accounts as efficiently during the period, allowing them to become past due. We recommend that the company increase its collection efforts on past due accounts.
This can be done by maintaining good communication with clients, sending monthly statements which include balance aging, and by setting stricter terms on those clients that do not pay on time. Debt Ratio—Strength The debt ratio of 45. 9% in FY8 is seen as a strength for the company. This figure is below the 57 to 67 percent considered normal for the industry. Because of this ratio score the company is seen more favorably when asking for financing from lenders. This also points to the fact that the company does have room to use more debt to finance operations and still remain an acceptable financial risk to lenders.
Gross-Profit Margin— Strength Gross profit margin remains steady at 27% (FY8) and this can be seen as a strength for the company. In comparison to its competition, Two Wheel Racing, which had 32. 1% (FY8), this low ratio indicates that the company is more competitive in its pricing, but more importantly it also indicates that there may be room still for the company to raise its price and still remain competitive in its market segment. Operating Margin— WPnimPee This is a weakness for the company, as it had a score a declining score over the previous year (1. 9% in FY8 versus 5. % in FY7) and was still below its competition (Two Wheel Racing) which had achieved 5. 2% 8 in FY8. This decrease can be attributed in the rise of operating expenses for FY8 in spite of its net sales decline. Recommend stricter expense controls to improve this margin. Net Profit Margin— Weakness This margin was at . 7 percent at FY8, down from 3. 3 percent on FY7. The net profit margin is also below the competition (TWR, FY8) which had achieved 5. 14 percent for the same period. This low margin is a direct result of decreased sales and increased operating expenses for FY8.
We recommend stricter expense controls and increased investments in advertising and R&D to boost sales. FarnirigS per Share (EPS)— Wpaknpec This important measure of stock performance is widely used by investors. The current EPS ratio of 4 cents per outstanding share of common stock during FY8 is down from 20 cents per share for FY7, and below the competition’s 8 cents per share for FY8. Because net earnings one of the main components of this ratio, during FY8 the decrease in net sales and the increase in operating expenses have lowered the ratio substantially.
We recommend that the company consider utilizing its cash to acquire additional stock as Treasury Stock to raise the price of outstanding shares. We also recommend that the company consider a reverse-split to increase outstanding share value and to avoid de-listing in the Philadelphia Stock Exchange. Return on Total Assets — Weakness A return of . 8 percent on total assets for FY8 indicates that the company is not using its assets effectively to generate profit. The score is well below the industry average of 5. 9% and also well below the competition’s (TWR) 4. 8% for FY8. The low score is mostly due to a very low net income for FY8, and the effect is compounded by growing total current assets. The company can increase sales, decrease operating expenses, and even increase product price to improve this ratio score. Return on Common Equity — Weakness The company’s rate of return of 1. 5 cents for every dollar invested in FY8 is a weakness. The ratio is well below the industry standard of 10. 5 cents per dollar, and also below the competition’s (TWC) 8. percent for FY8 As in the case of Return on Total Assets, the ratio is affected by the very low net income in FY8, and the effect is increased by the growth in stockholder’s equity for the same period. The company can increase sales, decrease operating expenses, and even increase product price to improve this ratio score. Price/Earnings Ratio — weaknpcc Although a ratio of 89. 73 for FY8 seems favorable, it is really a distortion of the base numbers used to compute it. During FY8 the company’s average stock price was $3. 10 and the EPS was . 04.
These low numbers generate a high PE ratio, but this ratio does not constitute an improvement, but rather the consequences of downward trends in another ratio and the lower stock price. To improve this ratio the company can improve its EPS ratio, as it cannot directly control stock prices. Times Interest Earned — Weakness A ratio of 1. 77 for FY8 in this area means that the company can only cover interest payments 1. 77 times with its operating revenues. This is considered a weakness as the U. S. average is between 2. 0 and 3. 0. It can be attributed to the company’s diminished sales for the period and its mounting Operating Expenses.
Another contributing factor is the high amount of interest expenses the company pays for its mortgage. We recommend that the company decrease its expenses and that it consider accelerating repayment of long-term payables (mortgage) in order to reduce interest expenses. 9 Working Capital Current State of Working Capital The company’s working capital is made up of its current assets minus its current liabilities and it signifies the resources which are immediately available to conduct business and generate revenue. In order to have a complete perspective of the company’s capital, we also need to look at its operating cycle.
The operating cycle is a multiple stage process in which inventory is purchased, goods are sold and money is collected. The operating cycle tells us how long (in days) it takes to convert working capital into revenue. An operating cycle also tells us if we are able to meet vendor payment terms and if our customers are meeting their credit terms. Overall, the working cycle tells us how long out most liquid assets are tied up in the production of revenue. The shorter cycle allows more resources (capital) to be freed up to generate more revenue. FY8FY7FY6
Net Working Capital1,306,6171,145,517924,223 Pct Cash34%10%28% Current Operating Cycle Operating Cycle Days46. 959. 8 Days Inventory Outstanding21. 727. 0 Days Sales Outstanding47. 752. 1 Days Payable Outstanding22. 519. 3 As we can observe in the above table, the company had over 1. 3 million dollars in net working capital for FY8, out of which 34 percent was made up of cash. We can also observe an upward growing trend in both net working capital and cash makeup from FY6 to FY7 and in FY8. Now looking at the operating cycle data we can see that overall, it takes the company 46. days in FY8 to convert capital into revenue, out of which 22. 5 days were payable outstanding and 47. 7 were sales outstanding. The company currently has net/15 terms with its inventory suppliers and based in the 22. 5 days payable outstanding it is not meeting those terms. The company also extends net/30 terms for its customers for sales on account. According to the FY8 days sales outstanding figure it takes an average of 47. 7 days for customers to pay the company. This figure also indicates a problem in the collection of outstanding accounts.
Improving Working Capital The company can take several steps to improve its working capital. The first is to negotiate better terms with its suppliers. We recommend having net/30 as this will allow the company to meet its obligation and to increase its cash resources by keeping its money working instead of in the supplier’s bank. 10 The company can also improve its collection of outstanding accounts. This can be done by improving current collection practices; including following up on customers and sending invoices which include balance aging information.
Finally, we also recommend that credit terms be lowered to net/15 for those customers that do not pay as agreed. This should add additional cash to the company’s working capital. Utilizing Excess Capital Excess working capital can be used to negotiate discounts in supplier purchases when cash payments are offered instead of paying with credit terms. This is a measure that directly impacts the company’s bottom line (net income) and that can be easily implemented. Excess working capital may also be used to accelerate repayment of long-term liabilities such as mortgage payable.
This will have a significant effect on net revenue by reducing interest expenses. Finally, investing this capital in the generation of new sales can be achieved by increasing advertisement, R&D, and Website Creation and Maintenance expenses. These three expenses directly support sales and increase profitability both in short and long term periods. Finally, the company may also utilize the excess working capital to finance the acquisition of additional assets and operations to expand its production, including but not limited to additional product offerings in other markets.
Basically any use of excess working capital towards any aspect of profit generation or debt reduction will yield better return than having the money unused and unproductive. Internal Controls Overall, companies must separate functions that may have conflicts of interest. For example, a single person may not authorize a purchase and issue the purchase order as it can constitute a conflict in interest and represents a lack of control by the company. Internal controls in general can be preventive, detective, corrective, directive, or compensating.
The most common internal control is preventive, which seeks to put measures in place to keep something from happening. Next most common is detective. This control seeks to detect the event after it has happened and it’s used in conjunction with corrective, which seeks to remedy a situation after it has been detected. Directive controls are those who seek to establish procedures or policies to deal with events in a company. Finally, compensating controls are those put in place to deal with events that take place in spite of other controls being in place. This can be seen as a redundant measure in case another control fails.
The company states that its purchasing department issues (at the first of each month) its purchase order based on a budget, to its supplier (lowest cost out of 3 quotes).
It then receives the merchandise (and sends it to production) and the invoice (forwards the invoice to accounting) for payment. It also states that left over inventory is sent (by production) to raw material inventory at the end of the month. (Western Governors University, 2011) 11 The information provided by the company shows internal control problems and inefficiencies in the purchasing, receiving, payment and inventory processes.
Weakness: The purchasing department is making purchases without any additional oversight. It both authorizes the purchase and issues the purchase order based on budgeted amounts. Corrective Action: Require the person responsible for the budget to issue a purchase request using a Requisition Formto Purchasing for the materials and the quantities needed and in accordance to the budget Risks of Weakness:Having Purchasing authorizing and purchasing can lead to unauthorized purchases and possible fraud.
Risk Mitigation:By enacting a purchasing request process we ensure that only purchases that are authorized and necessary are acquired by the Purchasing Department. Weakness: The purchasing department orders and receives the raw materials. Corrective Action: Separate the duties of purchasing from receiving. A receiving department needs to count all goods and certify receipt by issuing a receiving report to the purchasing department, the party requisitioning the goods, and the accounting department.
Risks of Weakness:Having the purchasing department buy and receive creates a substantial risk of fraud by allowing a single person to order goods and receive them. A person could, in collusion with a vendor, or by themselves, defraud the company by marking goods as received that were never received, or by processing invoices of goods at higher prices. Risk Mitigation:Having a separate party validate goods received allows for independent and more reliable receipt of goods. It also helps catch any discrepancies and order errors. This also makes it more difficult for a single person or a single department to defraud the company.
Weakness: The purchasing department receives supplier invoices and forwards them to accounting for payment. Corrective Action: Require suppliers to send all invoices directly to accounting. Accounting can then match the requisition to the purchase order, to the invoice to the receiving report before paying the supplier. Risks of Weakness:Having Purchasing authorizing and purchasing can lead to unauthorized purchases and possible fraud. Risk Mitigation:By requiring invoices to be sent to accounting instead of purchasing we allow accounting to independently verify transactions for Purchasing to invoices rom suppliers. We also avoid the possibility of payment delays for suppliers by reducing the amount of people that invoices must go through before being paid. This corrective action also helps the accounting 12 department verify from three independent sources that the order information is accurate and that the purchase has been authorized. Weakness: The accounting department is recording transactions and issuing payment checks for supplier invoices. Corrective Action: Separate the recording and reconciling of purchase transactions from the issuance of checks to suppliers.
Establish a voucher payment-request system to record payment authorizations. Have accounting issue the payment voucher after all documentation is verified. Require that an outside party like a Controller or a Treasurer issue the checks based on payment vouchers received from accounting. Risks of Weakness:Having accounting verifying purchases and issuing checks creates cash control issue as there is no other party verifying that the release of cash (a check) is done for authorized and correct amounts. There is also a risk of over/under payment of balances either by mistake or with the intention to defraud the company.
Finally, without a voucher system there is no evidence of who approved the payment and disbursement of cash. Risk Mitigation:Separating the functions of accounting and payment is essential to detect differences between the goods purchased and the cash disbursed to suppliers. Also, having a payment voucher system allows detection of incorrect payments to vendors and allows the company to identify irregularities in the disbursement of cash. Finally a payment voucher system allows the company to evidence and review past cash disbursements by vendor or by approver to identify any problems in recordkeeping.
Weakness: Inventory is not being performed on raw materials and current left-over materials are not being used to reduce future monthly budgeted purchases of goods. Corrective Action: Require the production line to inventory raw materials so that the amount of goods on inventory can be used to offset the month’s materials purchase. Risks of Weakness:Purchasing the full budgeted amount is inefficient and generates increasing amounts of left-over raw materials which can be used to supplement monthly purchases but instead are rolled from one month to another, tying up the company’s cash.
Risk Mitigation:By maintaining an accurate inventory of raw materials, and using this inventory to supplement monthly purchases we ensure that the company does not purchase goods it already has in hand, saving cash and possible delivery and labor expenses. We also ensure that cash is not tied up in inventory by using any left-over materials to manufacture in future months. Weakness: Numbered documents are not being used to ensure proper tracking and verification of transactions. 13
Corrective Action: Issue numbered purchase requisitions, receiving reports, payment vouchers, and purchase order forms. Risks of Weakness:Documents that are not pre-numbered create the risk of alteration and are difficult to trace and track. Risk Mitigation:By using numbered forms the company can keep track of the sequence of the transactions and can easily tie a requisition to a purchase order and a receiving report. This also allows better communication about the orders but helping people reference a distinct document number when referencing a transaction.
Finally, serializing documents allows accounting to verify and cross-reference transactions from different areas (purchasing, receiving, and accounting) for the purposes of auditing and fraud detection. Things like detecting duplicate orders under the same number (multiple copies), mismatched purchase orders to invoices, stolen/lost forms, and unpaid invoices are some of the conditions that can easily be verified using serialized forms. Sarbanes-Oxley The Sarbanes-Oxley Act of 2002 (SOX) was created to ensure that public companies reported accurate information in their financial statements.
The law was a response to several accounting scandals such as Enron and WorldCom, which severely affected investor confidence in the accuracy of these financial statements. Overall the law lays out management’s responsibilities of enacting and verifying internal controls to ensure the accurate reporting of financial information. The law also creates the Public Company Accounting Oversight Board (PCAOB) to oversee the work of auditors and sets down civil and criminal penalties for misrepresentation of information in financial statements(Sarbanes-Oxley Act of 2002).
The law’s two most significant sections are: Section 302: This section establishes that management is responsible for establishing, maintaining, and verifying internal controls to ensure that material information is made known to corporate officers, especially during the periods that financial statements are prepared. •Section 404: This section establishes management’s responsibility of reporting on the effectiveness of internal controls over financial reporting. This accomplished by implementing an internal control framework such as the one outlined by COSO. This section also requires the company’s external auditor to report on the effectiveness of the internal controls. Section 802:This section deals with criminal penalties (up to 20 years prison and fines) for violations to the Sarbanes-Oxley Act provisions. SOX Compliance The first compliance issue referrers to the weaknesses identified by the Internal Controls section of this report. These internal control deficiencies are material and go to the heart of SOX compliance. If the company is to state that it has reviewed its internal controls and that it has found them to be adequate, 14 it must first correct deficiencies related to requisitioning of goods, purchasing, receiving, raw materials inventory, cash management, and documentation of transactions.
Another compliance issue is that Competition Bikes, Inc. year-end report(Western Governors University, 2011) states that it has “designed a system to provide reasonable assurance to management… ” about the “… preparation and fair-presentation of published financial statements. ” This statement is not compliant with the requirements of SOX as it is management who is responsible for designing, maintaining and verifying these internal controls systems, and not how the financial statements are prepared or if they are fairly presented.
Another compliance issue is that management is not stating whether an external auditor has evaluated the internal controls to verify their effectiveness. Corrective Action The first recommendation for SOX compliance is to address the material weaknesses in internal controls identified in the following areas: •Goods Requisitioning: The company needs to establish a requisitioning system where the person with budget authority requisition for the needed goods. •Purchasing: The purchasing department must only be allowed to receive requisitions, select the lowest cost materials, and issue a purchase order.
It should be excluded from requisitioning, receiving, or invoicing. •Receiving: The company needs to establish a receiving system where a person will count all merchandise received and issue a receiving report to accounting, purchasing and the requisitioning party. •Raw Materials Inventory: The company must establish a raw materials inventory process to ensure that any raw materials not used during previous months are used towards future production of goods. •Cash Management: The company needs to separate the accounting and verification documents from the issuing of payment to the suppliers.
The accounting department should verify and record transactions, including the requisition of goods, the receiving report, the purchase order, and the supplier’s invoice. The company should institute a payment voucher system to control payment authorizations. •Documentation of Transactions: The company must issue sequentially pre-numbered forms for all its requisitioning, purchasing, receiving and payment processes to ensure proper tracking and accounting of all transactions.
We also recommend that the company separate its compliance statement into sections that directly relate to SOX requirements. Instead of issuing general narrative statements, the company should divide information into sections such as “SOX 302 Compliance” where it would list all the information required by the section and would describe how it complied. This helps provide clear and precise information to outside parties about the company’s compliance of SOX. 15
Another corrective action would be to re-word the statement about the company’s SOX Compliance in accordance to SOX requirements (Sarbanes-Oxley Act of 2002), to state that “management is responsible for establishing and maintaining internal controls” and that it has “designed such internal controls to ensure that material information relating to the company and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared. ” Additionally, we recommend that the company request a report from its external auditor regarding the ffectiveness of the internal controls over financial reporting, and that it include a statement indicating the results of such a report. 16 References Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745. Western Governors University. (2011).
JET2 Financial Analysis. Retrieved 02 23, 2011, from TaskStrem: http://file. taskstream. com/file/bt9a28Upp2h0H6g5evMuvshvM25mIkdWmn87vYqp795Mht0s4 R0t9frbNytoovcOpOtw3FikvqddWe6877cDpiw5edLwarvadAr019wbYsx48bcRwt4judZphbk2cZp6 p8gdUkc338bXybjracCd13s0cWarwo6bJxu7h3NxbbanbUeeqoddVm5grycH1euf3Fwqkgab/Km5ci /RJ ET_Task_4_Comp 17
