Trusty Treats Enterprise have been involved in the candy business for 2 years. The financial ratios of the company for two years (2019 and 2020) and the industry averages for the year 2020 are presented in TABLE Q2. TABLE Q2: Financial ratios Ratio 2019 2020 Industry average (2020) Gross profit margin 60% 62% 76% Net profit margin 53% 52% 53% Return on assets 10% 9% 13% Inventory turnover 7 times 9 times 16 times Average collection period 60 days 55 days 45 days Current ratio 6.2:1 5.5: 1 7.9:1 Quick ratio 3.2 :1 2.9 : 1 5.4 :1 After a long discussion with the management, you have also identified the following information regarding candy businesses: i. Suppliers sometimes offer discounted materials without any prior notice for a very short time to push the sale of old stocks. Therefore, candy businesses must be quick to take advantage when the opportunity arises. ii. Most of the candies have a very long shelf life and may be stored for an average of 2 years. This sometimes allows the business to buy in bulk to get more discounts. ii. Credit customers are the ones who would likely to buy in large quantities. iv. The current state of the industry is highly competitive. The market leaders create competitive advantages by providing unique and trending services to the customers V. The use of social media influencers and local celebrities as product ambassadors are good strategies to attract customers. Based on the financial ratios and the information obtained, assess the current
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
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