QUESTION

Assignment

1. Why are published financial statements produced and why do they need to be audited

1. Review the published financial statements for Domino’s. Produce a written report that analyses the financial statements. This report should contain some ratio analysis on the figures.

1. For one of the new stores (Newmarket)
   1. Produce a flexed budget for 2010 (based on 2009 budget and other provided information about the store, capacity, estimated staff and costs etc)
   2. Using the 2010 estimated figures calculate the breakeven point, discuss what the answer will mean for the company
   3. Produce a cashflow forecast for 2010

i.     Assume that store starts the year with an overdraft of £57,200

ii.     Repayments of part of the bank loan will need to be made in March, June, September and December, each repayment due is £60,000

iii.     A new pizza oven will be purchased in March at a cost of £210,000

iv.     Assume that sales and materials are split equally each month

v.     Ignore any pence

vi.     Assume that the franchise fee is paid monthly on the profit in that month (before any repayment of the bank loan)

1. Write an internal report for the new Sales and Marketing Director (so he can understand each of the stores)
   1. Summary of 2009
   2. Expectations for 2010
   3. Ideas and plans for expansion and development

SOLUTION

Importance of financial statements

The financial statements are prepared as part of the corporate governance of an organization which provide the overview as well as the detailed analysis of the financial position of the organization. It also highlights the performance of the organization by analyzing the financial statement on various parameters which include the ratio analysis of the company.

This is very important not only for the companies to analyze their performance in a given period but also acts as the benchmark for the investors to take important investment decisions. Thus the financial statement has to be easy to understand and the information should be clear enough for the investors to gather information that assist in decision making rather than being just numbers.

The financial statements include various aspects such as the directors and chairman’s report, income statement, balance sheet and notes for supporting these.

The purpose of the financial reports may be used by the shareholders or the management to take decisions related to business as to whether the company is growing, cash in hand, ability to take advantage of the market conditions, or in which direction to take the company forward.

The financial statements also help in estimating the operational efficiency of the company and thus assist in decision making for the same. It is also very important for the investors to seek information so that pragmatic and appropriate investing decisions can be made. Thus the financial statements acts as the base for such decisions.

It also is beneficial for the lending institutions in making decisions on whether the loans either long term or short term should be granted by analysing the financial health and the future outlook of the company thereby understanding its financial stability and recovering of loan in the state of decline.

It is very important that the financial statements are audited as it is the verification by the competent authority that the information that is provided is correct as far as the information has been disclosed by the organization. It lends sense of security and confidence for the investors that the information is correct and suitable decisions can be made based on the information provided. A certificate is issued by the auditor for the same. It is very essential as it ensures that the correct information is provided by the organization and the same has been verified by a person outside the company and thus the chances of manipulating with the figures can be reduced if not avoided completely.

The financial statements are prepared by the non profit organization and are audited. It is also well known fact before the electronic media was so prevalent annual reports served as the basis for communication of investors with the company and thus make investments. Thus it can be said that the financial statements are the pillar stone for a company that attract investors.

Financial Statement of Dominos

The review of the financial statement of Dominos includes the analysis for the return on investment and the return to shareholders.

The analysis based on the financial ratios has also been done and analysed with respect  to the previous year (i.e. 2008).

The return on investment and the return on equity is different from each other in the sense that the return on investment is the return on the total investment made in the organisation whereas the return on equity for the company is the return on the investments of the shareholders.

It has been viewed that there is huge difference between the return on investment is much less than return on equity. This shows that the interest of shareholders is the main concern in the company and it is beneficial for the investors have share in the equity of the company

The ratios for Dominos has been shown below

Current ratio which is similar to Acid Test Ratio or the quick ratio is also the measure of company’s ability to meet short term liquidity requirements (Troy, 2012). The current ratio is different from acid test ratio is that it also considers inventory which is not considered in acid test ratio.

Thus the current ratio is less conservative than acid test ratio and is important in accessing the operation efficiency of a company.

This can be seen that current ratio is decreasing.

Based on the two findings, current ratio and acid test ratio it can be said that the inventories of the companies are decreasing as although for 2009 the current ratio is lower, the acid test ratio is on the lower side when compared to 2008. The quick ratio is less than one for 2009 and thus is a situation of concern for the company. Although the company has been able to reduce the inventory and thus reduce the related costs but the positive effect of this cannot be seen in the quick ratio of the company, this is the a serious issue for the company.

The Gearing Ratio is reducing which means the liabilities are reducing as compared to shareholder’s funds which are a good sign but the interest coverage ratio is lower. This shows that the EBIT to Interest Expense are reducing. This can be said that the EBIT of the company is reducing as the interest expense will reduce because the gearing ratio is on the lower side.

The other ratios that have been shown above also show that the overall performance of the company is on the lower side when compared to 2008. It can be seen that the earning of the company has also been considerably reduced from 24% to 25%. Thus it can be said that the operational efficiency of the company has reduced.

There is huge issue for return on investments and the return on equity. It can be seen that there is considerable reduction in these figures from 2008 to 2009. This is showing the decline in interest of the shareholders as well as the investors. This is a big issue and considerable steps to regain the faith of shareholders and thus increase the investment in the organization without which the growth will not be possible.

The returns to investors and shareholders are the pillars on which the company relies and thus the performance of the company will not be considered satisfactorily and the factors that has led to such drastic reductions in the returns have to be identified and suitable steps have to be taken to reverse the effects.

Summary of 2009 and expectation from 2010 and possible solutions

Summary of 2009

The budget for 2009 can be attributed to the success of 2008 and thus can be said that it was a bit too aggressive. This over aggressiveness has led to the negative impact both in the market, investor relation and the shareholder interest. Thus the company faced the issue of investors going away and thus the budget for 2009 was considerably disturbed and thus poor performance in the year. Thus it can be said that the company has not properly analysed the competition in the market and thus estimates were on the higher sides and thus led to the results that were not expected as well as not wanted. Thus the experience in the industry should be utilized before making estimates and steps should be taken on how to overcome the competition in the market.

Expectations from 2010

The sales budgeted for the year 2010 have been evaluated based on the price and the sales forecast. Thus an estimate for the budget for the year 2010 can be made. Below are the sales shown on the per month basis for the complete year of 2010. This has been taken as per the expectation brief provided.

The next estimation has been done for the variable expenses which include the cost associated with the production of the pizza and the additional requirements such as toppings and other materials. Estimation for the salaries for the complete year has also been made.

However the picture that has been provided is clear and it can also be said that the budget has been prepared after taking into view the performance in the year 2009 and thus it can be seen that an effort has been made to improve the profitability of the company and thus regain the investors and shareholders’ interest in the company.

Plans for expansion and development

There are two ways in which a company can go in for the expansion and development. Firstly the company can go in for diversification of the products. There can be additional products that can be put in place. However such steps need to be taken after the complete market analysis and getting the estimate of the requirement of the customers.

It should also be noted that what steps are being taken up by the competitors in order to regain the market share and thus suitable steps to counter the steps taken by the competitors should be taken. The company should also consider gaining advantage by the experience in the industry they have and thus reduce the costs associated with the operations.

Secondly the company must go for expansion by going in for new markets and explore the options that are available there and hence boost the financial statements by increasing the profits by investing in new markets.  The expansion into new markets will certainly help as the company is facing competition which has reduced the performance of the company which is seen in the financial ratio analysis.

One option to gain the customer confidence is to provide custom products as per their requirements and thus this may attract more customers. Second is to explore the issues that customers find with the organization. It may be with regards to service, price or quality of product or the additional services that are being provided.

References:

Leo Troy, (2012), Almanac of Business & Industrial Financial Ratios

Charles K. Vandyck, (2006), Financial Ratio Analysis: A Handy Guidebook, Trafford Publishing

KG92

Please  Click on the  below links to Chat Now  or fill the Order Form !