The purpose of this report is to analyse Japheth Enterprises finances and provide information obtained through the analysis regarding the liquidity, short-term debt-paying ability and management of inventory for the year end 31 March 2016. This was done by calculating the financial ratios and analysing the income statement and balance sheet. All calculations can be found in the appendix.
The report will pay particular attention to the liquidity, short-term debt-paying ability and three issues in relation to management of inventory including; inventory turnover, number of days in a selling period and gross profit percentage.
The report will comment on these issues and provide recommendations that could help improve Japheth Enterprises …show more content…
This ratio is a key component in a business’ inventory management.
Japheth Enterprises number of days in selling period ratio is high in comparison to the industry ratio and has increased from the previous year and is high compared to other businesses in the same industry. This shows the business is taking longer to sell its inventory. Inventory is expensive for a business to keep, maintain and store so you want to make sure the business is moving the inventory as fast as possible to help minimise these costs and increase cash flow (My Accounting Course, n.d.a).
2.2.3 Gross Profit Percentage
Gross profit percentage is the percentage of money the business made from selling a good or service after subtracting the cost of producing that good or service (Gilson, D., n.d.). The gross profit is used to estimate ending inventory in a reporting period (Accounting Coach, n.d.). It is the pure profit from the sale of inventory that helps to pay operating expenses (My Accounting Course, …show more content…
• Current ratio is within the industry’s healthy range but ideally should be over 2. There has been a sufficient decrease in current ratio in comparison to the previous year indicating your business may have problems meeting your short-term obligations.
• Quick ratio is below the industry average and decreased from the previous year. The business does not have enough adequate current assets, without inventory, to cover short-term debt.
• Inventory turnover is lower from the previous year which is a signal of inefficiency; it implies either poor sales or excess inventory. It also carries a high risk of inventory becoming obsolete.
• The number of days in a selling period ratio is higher than the previous year which shows it is taking longer to sell its inventory. You want to make sure the business is moving inventory as fast as possible because maintaining and storing it is expensive.
• The gross profit percentage is lower than the previous year and lower than the industry average margin. A lower-than-industry-average gross profit margin diminishes your chances of generating a net profit.