Use of Financial Reporting for Business Decisions Eight years ago Sue and Jim Wi

Question

Use of Financial Reporting for Business Decisions Eight years ago Sue and Jim Williams established the Surf Clothing Company, which produces clothing and then sells the clothing through their retail stores. Sue and Jim use an accounting system to keep track of revenue and expenses. First, the revenue and expenses are summed across all stores to provide an overall report. Second, revenue and expenses are reported per retail store so that an individual store's performance can be monitored. Third, revenue and expenses arc reported per category of clothing (categorized by age group and gender) so that the performance of each clothing category can be monitored. This helps Sue and Jim to identify the underlying reasons for the over-all performance of the business. Use of Accounting to Assess Consumer Demand. How can the accounting system be used to compare consumer demand across the stores? How Financial Reporting Can Help Assess Managers. How can the accounting system be used to determine which stores deserve extra funding to support expansion? How Financial Reporting Can Help Plan for Expansion. Sue and Jim Williams an planning to establish new clothing stores. First, they want to assess the performance of two stores that they opened earlier this year to detect any deficiencies in those stores that could he avoided in the new stores. How can accounting information he used to detect such deficiencies? How Ratio Analysis Can Guide Production Decisions. Explain how ratio analysis may affect the decision regarding the amount of clothing to order for the stores each month.

Explanation / Answer

Ratio analysis guide production decisions

Accounting Sciences in this research, we picked interest in one of techniques that is commonly used in decision making since it naturally provides much information in almost every aspect of the business. The researcher was motivated to find out the effectiveness of using accounting ratios in decision making of the enterprise. The student was also interested in knowing whether this techniques is used or not, and what could be the requirement to use them effectively.

The discussion was designated to accomplish the following objectives:

1. To identify the importance of using accounting ratios in decision making

2. To know whether accounting ratios are used in AMAZI YA HUYE

3. To determine the linkage between accounting ratios and decision made in AMAZI YA HUYE

4. To determine other factors used in decision making

5. To identify the constraints that hinder the proper use of accounting ratios

Type of ratios used

For this purpose 32 ratios were selected based upon a review of text books. These ratios were divided into 5 categories of analysis, such as ratios to use in analyzing liquidity, efficiency, sales profitability, debt, and in multiple dicsriminant analysis. The management staff of AMAZI YA HUYE disclosed that ratios are frequently used by the company in analyzing profitability and liquidity. They said that ratios used in this manner are more significant to take any decision.

Accounting ratios and decision making

To determine whether there exists a linkage between accounting ratios and organization sustainable growth, the researcher asked the following question to the respondents.Do you agree that, the use of accounting ratios can lead to the decision making? The following table shows categories of their responses:

Preferred ratios in decision making

What among the following kind of accounting ratios do you take into account while making decisions and for which purpose?

· Liquidity ratios

· Debt ratios

· Efficiency ratios

· Sales and profitability ratios

Preferred ratios in analyzing liquidity

The following ratios in analyzing liquidity:

· Current ratio

· Quick ratio (acid test ratio)

· Cash ratio

Preferred ratios in analyzing efficiency

Concerning efficiency ratios, Following are some of these ratios:

· Inventory Turnover

· Days in Inventory

· Assets turnover

· Receivables Turnover

· Average Collection period

· Accounts Payable turnover

· Days AP outstanding

Preferred ratios in analyzing debt

The following set of ratios to analysis debts of our case study.

· Total Debt ratio

· Debt-Equity Ratio

· Long-term Debt to capital

· Asset-Equity Ratio or Leverage Ratio

Steps which affected the decision regarding the amount of clothing to order for the store each month

1. Control your inventories (never buy more than you can realistically expect to sell in eight weeks). Ask yourself with every PO that you write, “Do I really need this much?” Remember that scarcity increases demand and that it is easy to buy 500 of any items, but much more difficult to find 500 customers that want it.

2. Always try to get exclusives so you are not being shopped on an apples to apples comparison basis. If you cannot get total exclusivity, then get time (first three months) or get geographic (only one in your city to sell it), or channel, (only gift store). Even if you can get different packaging that will make it look less like the others, it can work.

3. Nurture your customers who do not shop you on price alone. Send thank you cards and maintain close relationships with those good customers. Help them by creating gift registries, remembering important dates for them, become more than an item provider in their life. Add value to what you do for them.

4. Always keep your markdown items at the back of the store where the customer has to search to find them. Drag them through the total store and tempt them with your good items before they see the markdowns.

5. Remember, the price you paid for the item has nothing to do with the selling price. We have always said that “Your first markdown is the cheapest”. If you take a markdown (and NEVER take a markdown without knowing the cause) and the item sells out immediately, do not regret the fast sale. Pat yourself on the back: you paid your tuition and do not make the same mistake again

Inventory, can’t live with it, can’t live without it! A critical analysis of your current inventory and a plan for new buying can and will increase not only your profitability, but also your customer service levels.

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