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FNCE100 Corporate Finance

Published : 13-Sep,2021  |  Views : 10

Questions:

1. Compute and report at least four of the ratios identified in the statements (quick ratio, current ratio, or other)

2. Summarize what each ratio measures.

3. Investigate how the organization is performing based on industry standards for those ratios.

4. Compute cost variances.

5. Compare your cost variance computations with the variance report at:

6. Analyze cost variances and propose tactics to align actual results to budget.

7. Defend how benchmarking helps improve budget management and give examples.

Answers:

1. Computation of Ratios

In order to analyze the financial performance of Monero Medical Center, ratios are calculated based on the balance sheet and income statement of the company. For analyzing the liquidity and profitability position of the company, current ratio, quick ratio, equity ratio and profit margin ratios are evaluated (Archibald-Seiffer et al., 2015). From such analysis it is gathered that current ratio of Monero Medical Center has decreased in the year 2013. Moreover, quick ratio has also decreased in 2013 with equity ratio and profit margin ratio remaining constant.

Ratios

2012

2013

Current Ratio

3

1

Quick Ratio

14.5174224

4.598269

Equity Ratio

1

1

Profit Margin Ratio

0

0

2. Summarizing Indication of Each Ratio

  • Current Ratio- Decrease in current ratio of the company indicates that the company is failing to address its debt obligations and is incapable to maintain its liquidity (Baños-Caballero, García-Teruel & Martínez-Solano, 2014).
  • Quick Ratio- Decrease in quick ratio indicates that the company is not capable to pay its current liabilities in a better manner for maintaining business liquidity.
  • Equity Ratio- This ratio remains constant that indicates the company’s assets are financed by its investors and a constant amount of assets are finance by debt (Delen, Kuzey & Uyar, 2013).
  • Profit Margin Ratio- This ratio remains 0 that indicates the company is not attaining enough net sales and decreasing its expenses that could have increased its net income.

3. Organizational Performance Based on Industry Standards

Performance of Monero Medical Center is also analyzed based on comparing the company’s ratios with the industry standard ratios (Farkas, Kersting & Stephens, 2016). From such analysis it is gathered that current ratio of the company is observed to be 1 in the year 2013 in comparison to the industry standard that is 2.78. Quick ratio of the company is observed to be 4 in the year 2013 in comparison to the industry standard that is 1.09. Equity ratio of the company is observed to be 1 in the year 2013 in comparison to the industry standard that is 2.09. Profit margin ratio is observed to be 0 in the year 2013 in comparison to the industry standard that is 1.7 which indicates that the company is not able to make enough profits. Quick ratio comparison indicates that the company is able to pay off its debt obligations and maintain its liquidity in a better manner.

4. Computation of Cost Variances

Cost variance for Monero Medical Center is computed in order to analyze the variance in the actual and projected operating budget for the year 2013. Cost variance is observed in total revenues, total expenses and the net income of the company. Cost variance is computed through deducting actual operating budget from projected operating budget (Lee & Renner, 2016).

 

Total of Actual Operating Budget (2013)

Projected Operating Budget (2013)

Cost Variance

Total Revenues

925,963

451,030

474,933

Total Expenses

924,586

455,749

468,837

Net Income

1,256

-4416

-3,160

5. Comparison of Cost Variance Computations with Variance Report

Cost variance computations of Monero Medical Center are compared with the operating budget variance report for the year 2013. Such computations facilitated in evaluating the cost incurred actually and the budgeted amount of cost that was estimated to be incurred. Such variances were analyzed to track expense line items along with evaluating variances in revenue and net income earned by the company. From such computations it has been observed that cost variance in total revenue is observed to be 474,933, cost variance in total expenses is 468,837 and variances in net income are 3,160. Such variances indicate that the company’s actual revenue is more than the projected. Total actual expenses of the company are also observed to be more than projected. Moreover, net income of the company was projected to be negative but actual net income has turned out to high and positive (Vogel, 2014).

6. Strategies for Aligning Actual Results to Budget

After analyzing the cost variances several strategies can be developed in order to along actual with the budgeted results. The company must develop strategies in ensuring the ways in which financial forecasting and actual results with implemented strategies can be aligned (Ming, 2017). Measuring performance indicators is another strategy that can facilitate Monero Medical Center in evaluating failure or success of the projected data. Another strategy can be setting realistic goals along with making projections in consideration to competitive and economic environment.

7. Benchmarking Improves Budget Management

Benchmarking can be easy measurement through which through which a company can be able to measure its budgeted results with asset management. This kind of high level benchmarking focuses an organization on attaining targets along with centering on the areas of potential operating weaknesses. Benchmarks are established on attainable budget (Matthew, Fada & Ukonu, 2016). After setting a particular benchmark, a company must ensure that the budgets are based on the strategies through which operating goals can be attained. Budgets and benchmarks also serve as a function of internal audit in order to highlight accounting issues like timing issues for costs and revenues.

References

Archibald-Seiffer, N., Jacobs Jr, J. C., Saad, C., Jevsevar, D. S., & Shea, K. G. (2015). Review of anterior cruciate ligament reconstruction cost variance within a regional health care system. The American journal of sports medicine, 43(6), 1408-1412.

Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2014). Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), 332-338.

Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.

Farkas, M., Kersting, L., & Stephens, W. (2016). Modern Watch Company: An instructional resource for presenting and learning actual, normal, and standard costing systems, and variable and fixed overhead variance analysis. Journal of Accounting Education, 35, 56-68.

Lee, M. T., & Renner, C. J. (2016). Global Dental Equipment: How Variance Analysis Can Help a Startup Business Survive Growing Pains. International Research Journal of Applied Finance.

Matthew, D. A. A., Fada, A., & Ukonu, I. C. (2016). Role Of Financial Ratio Analysis In Assessing Business Performance In The Hospitality And Tourism Operations. Development, 4(4).

Ming, S. (2017, January). Design and Realization of Product Cost Variance Analysis System. In Measuring Technology and Mechatronics Automation (ICMTMA), 2017 9th International Conference on (pp. 57-59). IEEE.

Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

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