Joe Murphy retired a few years ago at the age of 48, having built up a substanti

Question

Joe Murphy retired a few years ago at the age of 48, having built up a substantial retirement portfolio through a range of entrepreneurial activities. He moved to the Snowy Mountains to follow his dream of a peaceful mountain life. However, after a few months, Murphy became restless and opened a ski equipment store. This single store soon grew into a chain of four outlets spread from the Snowy Mountains to the Victorian Alps. As Murphy put it, ‘I can't believe how fast we've expanded. It's basically been uncontrolled growth—growth that has occurred in spite of what we've done’. Although business was profitable, the chain did have its share of problems. Sales tended to be seasonal, with a slowdown once the snow had disappeared. Murphy therefore added fishing and camping equipment to his product line. The need to finance required inventories seemed to be bulging and left cash balances at very low levels, occasionally giving rise to short-term bank loans. Part of Murphy's business focused on skiing trips, which were arranged through local ski lodges, and included ski hire, lessons and lift passes. Reports from the company's financial accounting system seemed to indicate that this part of the business was losing money because of increasing costs, but Murphy could not be sure. ‘The traditional income statement is not too useful in assessing the problem’, he noted. ‘Also, my gut feeling is that we are not dealing with the best suppliers in terms of quality, delivery reliability and prices.’ Additional complications were caused by an increasingly competitive marketplace, with many former customers now buying equipment through the internet. Murphy was not sure what to do. The company's accountant was very good at keeping the books and preparing the financial statements and tax return, but she did not understand the way the business really worked.

Required:

1 Describe the types of information that Murphy needs to run his business more effectively.

2 Murphy approaches the accountant to seek her help in gathering and analysing this information, but she responds: ‘You must be joking—I'm an accountant. My job is to look after the money side of the business!’ Do you agree with this statement?

3 What actions would you recommend that Murphy takes?

Explanation / Answer

Murphy could use variety of information to help him to run his business more effectively and efficiently. Inventory, supplier performance, cash flow and loss of customers are the main areas of concern. The following information may be useful

2.

The responsibility of accountant is to provide information to managers to assist in creating value and managing resources. Information includes both financial and non financial information. Providing only financial information is not sufficient. There is no proper evidence that the budgeting systems are put in place properly. Income statements need to focus on areas of business that are interest to manager such as ski business and sales outlets. Performance indicators need to indicate those areas where performance requires to be improved.

3.

Murphy is required to provide more detailed reporting systems including detailed profit reporting, budgeting system and performance indicators. if the accountant provide any assistance in these developments then such accountant may needs to be replaced or other managers may require to appoint to provide assistance.

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