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Accounting is defined as financial situation. Accounting report is to show all the costs and profits of the organization in order to manage cash flow. The content of this report is the analysis, comments and evaluation based on accounting report of Scomi Group Bhd Company. The Scomi Group Bhd Company is a representative oil and gas industry. The company was opened on 13 May 2003. The company engaged in the production of oil and oil drilling. In addition, Scomi Group Bhd is also engaged in other activities such as transportion industry, refine crude oil and produce energy (Scomi, 2004-2010). This report will start with financial report analysis of Scomi Group Bhd in order to find the quantitave and qualitative value followed with liquidity ratio. This is done to know the overall progress of the company. At the end of the report, a conclusion will be given.
Financial Ratio Analysis: Liquidity Ratios
“Financial ratio analysis refers to a financial statement analysis technique which involves expressing one financial statement item relative to another financial statement item” (Peirson & Ramsay, 2006, p.860). There are five major area of financial ratio analysis: Liquidity, Activity, Profitability, Stock Market and Leverage. Howeverm this report will only concentrate on the liquidity aspect of financial ratio analysis.
“Liquidity ratios are referring to a total dollar value of cash and marketable securities divided by current liabilities. The liquidity ratio measures the extent to which a corporation or other entity can quickly liquidate assets and cover short-term liabilities, and therefore is of interest to short-term creditors” (Investorwords, 2010). To be able to analyze liquidity ratios, three keys of liquidity ratios were calculated, which are: Cash (working capital) ratio, Quick asset (acid test) ratio and Stock (average inventory) turnover period. In addition, two more keys are added: Average debtors collection period and Cash or operating cycle. All calculations, data, charts and graphs of liquidity ratios were attached in this report as appendix to illustrate the financial ratio analysis.
Cash (working capital) ratio
“The cash ratio refers to a measurement of the amount of current assets to offset current liabilities” (Businessplans, 1994-2010). A cash ratio larger than one shows that the unit can cover its current liabilities from its current assets. In 2005 the cash ratio is 1.49:1 and in 2006 its cash ratio has increased to 1.60:1 (Refer to appendix 1.1 and 2.1). However, from 2006 to 2009 cash ratio always decreased. During this duration, in 2006, Scomi had a cash ratio of RM1.60 of current asset per Ringgit of current liabilities. This amount decreased to RM1.43 of current assets per Ringgit of current liabilities in 2009. According to this result, in five years Scomi always had cash ratio above 1. It means that Scomi still have enough assets to meet its liabilities and is therefore technically still solvent. However Scomi cash ratio still close to 1 which means that they have RM1.43 of current asset to pay each Ringgit of their liabilities. This means the business is ‘walking on a thin ice’ where the business risk is still high where they are barely able to pay their liabilities.
Quick asset (acid test) ratio
“Acid test ratio refers to key measure of a company liquidity that exclude the inventories or stock to be more focus on the liquidity of assets per dollar of liabilities” (Businessdictionary, 2010). In 2005 Scomi had RM1.10 and increase to RM1.22 of liquid assets per dollar of liabilities in 2006 (refer to appendix 1.2 and 2.2). According to the appendix, Scomi acid test ratio’s graph from 2006 to 2009 shows that it is not stable. From 2006 to 2008, it keeps declining from 1.22:1 to 1.10 and increased to 1.14 in 2009. According to its result in five years, Scomi had acid test ratio more than 1. That means Scomi still can fulfill their liabilities without having sell their inventories and it could make investors more relaxed about their liquidity.
Stock (average inventory) turnover period
“Stock turnover period refers to how many time over the business has sold the value of its stock remain during a year” (Bized, 1996-2010). In 2005 stock remained on business for an average of 79 days (refer to appendix 1.3 and 2.3). This result continues to fluctuate from 2005 to 2009. The result of this ratio shows the number of days that on average money is hold up in Scomi stocks. The shorter the days, the better it is for business as the organization money will be able to be used again as soon as possible.
Average debtors collection period
“Debt collection period refers to how long on the average time taken by the firm to collect money from customer following credit sales” (Bized, 1996-2010). In 2005 Scomi took an average of 95 days to collect its debt (Refer to appendix 1.4 and 2.4). In 2006 it has decreased to 93 days. However from 2006 until 2009 it was increased from 93 days to 108 days. The higher rate of this ratio means the firm needs more time to collect debt from debtors.
Cash or operating cycle
“Cash or operating cycle refers to the number of days from cash to inventory to accounts receivable to cash” (Bizwiz, n.d.). Cash cycle can be measured by summing stock turnover period and the average debtor collection period. In 5 years from 2005 to 2009, Scomi took an average of 174 days in 2005 and in 2009 this had increased to 186 days from acquiring inventory to collecting cash from its sale (refer to appendix 1.5 and 2.5). This means that Scomi can get a clear picture to predict when their cash become solvent.
Working Capital and Cash Flow Statement
According to Calberg (2008), cash refers to the most liquid asset of the company. Many investors are mostly interested with value of cash that company has. By analyzing company cash flow the investor can get the measurement of company management performance that related to company funds. To focus more on the analysis of company funds, investor need to include concept of working capital. “Working capital refers to the amount of money that a company has tied up in funding its day to day operations” (Pietersz, 2005-2010). This is done by analyzing the Scomi cash and working capital based on their cash flow statement for FYE 2008 and FYE 2009. According to cash flow statement for operating cash flow before working capital changed, in 2008 it was RM230,740 and has decreased to RM207,452 by 2009 (refer appendix 3 and 3.1). However, after working capital changed, the net operating cash flow was RM52,232 in 2008 and increased to RM149,401 in 2009. In summary, by including working capital, it acts as an important measure of company’s financial stability. According to both result in 2008 and 2009, Scomi cash flow statements and Scomi assets have been decreased after included the changes in working capital. From this data, investors can see a more accurate data of Scomi funds for their investment analysis.
Scomi Group Bhd. annual report
4.1 Concepts, Conventions and Regulation of Scomi annual report
Scomi annual report was prepared based on matching or accrual accounting concept. “Matching or accrual concept refers to that every income should be properly matched with the expenses of a given accounting period” (Tutor2u, 2006-2010). This concept helps investor to analyze the company financial data with criteria ‘income must match the cost’. Thus, company can reduce losses and by making more income which can cover their cost.
Scomi annual report also prepared with historical cost accounting convention. “Historical cost accounting refers to report of transaction that are supported by documentary evidence and it could be argued, therefore, that the information generated by historical cost accounting is representational faithfully, neutrally and freely from undue error and hence reliable” (Peirson & Ramsay, 2006, p.693). Scomi group bhd. historical cost was already known and kept in the archives of the prices which have been bought up. The one purpose of historical cost is to help the company to monitor and compare the costs in every period of time.
According to Scomi Group Bhd. Financial statement, the company has used the realibility aspect which is based on accepted accounting regulations. “Reliability refers to implication that information that was presented is accurate, truthful, complete and capable of being verified” (Tutor2u, 2006-2010). That regulation helps investors to understand the financial situation and make a more accurate and informed decisions
4.2 Directors’ report, the auditor’s report and the chairman’s statement
Director report provides information such as principal activities, financial results, dividends, reserves and provisions. It helps the company to analyze their financial data deeply in their financial data analysis. One way to do this is through regulate and compare the financial situation difference of each year. In here there’s principle activities that show what the company does and what services the company has. In addition, there’s also financial result which shows the revenues and expenditures of the company. In director’s report there is also a dividend that are paid to shareholders based on the amount of previous year.
Auditor’s report is considered one of the most important aspect. In Scomi Group Bhd the auditor’s report includes: report on financial statement, director’s responsibility for the financial statements, auditors’ responsibility and auditor’s opinion.
Chairman statement comes two directors of the company Scomi Group Bhd which provide information and analysis all financial reports in 2009. The statement is made to compare and analyze income and expenses of the company.
Qualitative & Quantitative point of Scomi Group Bhd.
5.1 Qualitative point
Scomi Group Bhd produces oil and gas in large quantities and at affordable cost for people. Partnership and the company are located in 29 countries. The company produces all kinds of transportation services for people in need of vehicles. It is very convenient, fast and profitable for people to use buses, montreal and trains. Scomi Group Bhd Company provides an opportunity for people to save time and money by using the transportation provided. The company also produces through offshore energy resources, drilling and refining. Based on consumers feedback, Scomi Group Bhd is considered to be one of the best and a successful company in its field.
5.2 Quantitative point
According to Scomi liquidity ratio in 2009 (refer to appendix 1.1, 1.2, 2.1 and 2.3), with cash ratio of RM1.43 and acid test ratio of RM1.14, the company cash can actually solvent. With the cash ratio of RM1.43 means that Scomi still have enough assets to meet its liabilities and is therefore technically solvent. Acid test ratio in 2009 amounted RM1.14 means that Scomi still can fulfill their liabilities without having to sell their inventories and it could make investors more relaxed about their liquidity.
In summary, financial ratio is the essential part of accounting. By using financial ratio such as liquidity ratio, managers can analyze the company funds that are important for making decision for business performance like investment. To analyze more detail on the company cash, managers also need to analyze the cash and working capital management that are based on cash flow statement. Including the working capital changes, managers can get more accurate information that they need, such as net assets of company. With all those accounting analysis mentioned above, it is possible to find the quantitative standpoint of the company that need to be supplemented to qualitative factors in which can be used as essential information to get a more accurate and complete information of the company.
Scomi Group Bhd. Liquidity Ratios are based on balance sheet ratios and cash or operating cycle ratios. According to the company annual reports from FYE 2005 to FYE 2009 (Scomi, 2004-2010), these are the calculations:
1.1 Cash ratio calculation
Cash (working capital) ratio:
FYE 2005 cash ratio: = 1.49 : 1
FYE 2006 cash ratio: = 1.60 : 1
FYE 2007 cash ratio: = 1.56 : 1
FYE 2008 cash ratio: = 1.50 : 1
FYE 2009 cash ratio: = 1.43 : 1
1.2 Quick ratio calculation
Quick asset (acid test) ratio:
FYE 2005 quick ratio: = 1.10 : 1
FYE 2006 quick ratio: = 1.22 : 1
FYE 2007 quick ratio: = 1.11 : 1
FYE 2008 quick ratio: = 1.10 : 1
FYE 2009 quick ratio: = 1.14 : 1
1.3 Stock turnover ratio calculation
Stock (average inventory) turnover period:
FYE 2005 average stock period: = 79 days
FYE 2006 average stock period: = 78 days
FYE 2007 average stock period: = 81 days
FYE 2008 average stock period: = 77 days
FYE 2009 average stock period: = 78 days
1.4 debtor collection period calculation
Average debtors collection period:
FYE 2005 average collection period: = 95 days
FYE 2006 average collection period: = 93 days
FYE 2007 average collection period: = 98 days
FYE 2008 average collection period: = 104 days
FYE 2009 average collection period: = 108 days
1.5 Cash cycle calculation
Cash or operating cycle: average stock period + average collection period
FYE 2005 cash cycle: 79 days + 95 days = 174 days
FYE 2006 cash cycle: 78 days + 93 days = 171 days
FYE 2007 cash cycle: 81 days + 98 days = 179 days
FYE 2008 cash cycle: 77 days + 98 days = 175 days
FYE 2009 cash cycle: 78 days + 108 days = 186 days
Financial ratios for liquidity ratios data, chart and graph:
2. Liquidity ratios table
Cash (Working Capital) ratio
Quick asset (acid test) ratio
Stock (average inventory) turnover period
Average debtors collection period
Cash or operating cycle
2.1 Cash ratio Graph
2.2 Quick ratio Graph
2.3 Stock turnover period Graph
2.4 Debtors collection period Graph
2.5 Cash cycle Graph
Cash flow statement analysis FYE 2008 and FYE 2009:
3 Cash flow statement 2008 and 2009
Cash Flow Statements (before working capital changes)
Cash Flow Statements (after working capital changes)
3.1 Cash flow statement 2008 and 2009 Graph
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