Question :
Various elements of accounting like cash flow, gross profit etc. are needed to be explored by considering case study of Smartco Stores Group.
- Explain how stakeholders of Smartco Stores Group can use of available data.
- Describe the plan adopted by Smartco Stores Group for improving their financial performance.
- Recommend different sources of finance that are available to Smartco Stores Group for achieving their investment plan.
- Examine various factors that impacts of sales on Smartco Stores Group.
- Describe concept of income elasticity of demand.
Answer :
INTRODUCTION
Business accounting lays emphasis on recording transactions which in turn helps in evaluating financial performance of the company. Further, field of economics present the level to which price and income level has an impact on quantity demanded. The present report is based on the case situation of SmartCo which offers groceries and retail products or services to the customers. In this, report will present whether financial performance of Smartco is good or not. Besides this, report also depict how price and income elasticity affects demand for grocery products in UK.
BUSINESS ACCOUNTING
Q.1
Internal stakeholders:
- Management: Higher management team takes decision
- Employees or personnel: Aspects in relation to sales and profit margin helps personnel in making estimation about bonus, salary and incentive plan (Titman, Keown and Martin, 2017).
External stakeholders:
- Shareholders: They make evaluation of EPS and share price while taking decision pertaining to investment.
- Suppliers: Trend of sales and profit margin helps suppliers in assessing whether Smartco is able to make due payment on time or not.
Q.2
Profitability ratios assessment
|
Years |
Sales |
GP |
GP ratio |
|
2008 |
37,976 |
2,060 |
5.4% |
|
2009 |
39,759 |
2,154 |
5.4% |
|
2010 |
42,321 |
2,348 |
5.5% |
|
2011 |
45,080 |
2,406 |
5.3% |
|
2012 |
44,970 |
2,143 |
4.8% |
The above depicted table shows that financial position and performance of Smartco Stores Group was improved over the time frame. In 2008, ROCE of the company accounts for 12.4%, whereas at the end of 2011 it reached on 13.6%. Further, EPS offered by the company to its shareholders have also increased during the period of 2008-2011. In the context of GP margin, fluctuated trend has been assessed. Hence, during the period of 4 years, from 2008 to 2011, monetary position of Smartco was good. However, in 2012-13, profitability aspect of Smartco was decreased due to taking decision in relation to resetting margin. Along with this, shift in the customer’s purchasing pattern from physical to online retail store may be served as a main cause behind decreasing profitability level. Thus, for enhancing financial performance Smartco group is required to make changes in the existing strategic or policy framework.
Q.3
Sales revenue – Cost of goods sold = Gross profit
Thus:
COGS = Sales revenue – GP
|
Years |
Sales |
GP |
COGS |
|
2008 |
37,976 |
2,060 |
35,916 |
|
2009 |
39,759 |
2,154 |
37,605 |
|
2010 |
42,321 |
2,348 |
39,973 |
|
2011 |
45,080 |
2,406 |
42,674 |
|
2012 |
44,970 |
2,143 |
42,827 |
Q.4
For making improvement in the financial position and performance Smartco is planning to expand business operations over the globe specifically in eastern European and Asian markets through the means of merger & acquisition, joint venture etc. In addition to this, by establishing online retail store company would become able to enhance customer base and meanwhile both sales as well as profit margin.
Q.5
Specifically, there are mainly two sources which Smartco stores can use fulfilling financial requirements of £500 million’s pertaining to the investment plan such as:
- Equity shares: By issuing shares to both existing and potential shareholders business unit can meet financial needs. This is the most effectual sources of finance which help company in raising funds at low cost (Bekaert and Hodrick, 2017). Moreover, in this, firm offers dividend to the shareholders only when it generates enough profit during the concerned period.
- Bank loan: Smartco can also get funds for the concerned investment plan by approaching banking institutions for loan. Such financial source offers benefits in terms of tax brackets and thereby enhances profitability.
At the time of raising funds from the above depicted sources firm should keep in mind ideal debt-equity ratio such as 5:1. This in turn helps company in developing optimal financial structure.
ECONOMIC ISSUES
Q.1
By doing assessment of case study some factors have identified which in turn closely the demand (sales) in the context of UK retail store:
- Rapid changes in the technological aspects: Online shopping trends
- Condition of economic slowdown
- Lack of innovation
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