Financial Statements

Krispy Kreme Doughnuts was formed in 1933 when Vernon Carver Rudolph bought a doughnut shop in Kentucky. By 1937 the business had branched into a wholesale operation, supplying local grocery stores. Today, the business is owned by Krispy Kreme franchises and there are approximately 449 factory stores throughout the world.

Krispy Kreme first floated on the NASDAQ in 2000 and, with a share price of $40.64, immediately gained a market capitalization of $500 million.  A year later they switched to the NYSE where they now trade under the ticker symbol KKD.

In order to perform a financial analysis of Krispy Kreme we will utilize three main financial statements; the income statement, the statement of cash flow and the balance statement.

The Income Statement, or profit and loss statement, will allow us to observe how much profit has been generated by KKD and will allow us to observe how profitable the business is.  Whereas the income statement reports the results from operating the business over a given period of time, the balance sheet provides a picture of the firm’s value at a snapshot period in time by presenting details of its assets, liability and owner equity.

Whilst an income statement reports a company’s profits this is not actually the same as their cash flows.  It is therefore important that we also look at this when analyzing the financial health and wellbeing of a company.  By looking at the free cash flows we are able to observe how much cash is available to the company after they have paid for their investments in operating capital and fixed assets.  The free cash will be the amount that is available to redistribute to the owners and creditors.

The financial reports for Krispy Kreme between the years 2005 and 2007 can be found in Appendix A.  At first glance it is evident that a has been made over the last three years since their 2005 filing.  This could be potentially attributed to their rapid growth and extension that has necessitated large investments in property, plant, equipment and investments in equity method franchises.  The losses, however, have reduced from $7.2 million in 3rd quarter 2006 to $798 in the 3rd quarter of 2007 that could indicate an improvement.

The operating income, excluding the $21.05 million in depreciation, of Krispy Kreme at the end of the 3rd quarter 2007 was $22.11. The company has reported an investment of 12.63 that their annual report (www.krisykreme.com) attributed to the sale of property and the reacquisition of some of the franchises.  In addition to this KKD retired some of their long debt leading to a net loss of $15.48 in financing activities.

The statement of cash flows reveal a net credit to impairment and lease termination of $268,000 in the 3rd quarter of 2007, a huge shift from the charge of $5.4million of 3rd quarter 2006.  Clearly in the latter stages of 2006 a number of stores were closed or the franchises were terminated.  The third quarter 2007 balance sheet shows that KKD had cash of $23 million and a debt of $88 million.

In order to fully understand KKD’s position in the market we need to understand the data in relative terms, i.e. how is KKD performing in comparison to their competitors or similar companies. An analysis of KKD’s financial rations provides us with further insight into their operations and can allow us to better highlight their strengths and weaknesses.  The debt ratio indicates how much debt KKD are using to finance their assets.  KKD’s debt ratio discloses that the company has a debt level that matches their level of assets.  This is clearly bad news.

Furthermore they have negative earnings per share ratio of -5.45.  This EPS ratio is significantly below the industry average of -2.75 will entail that it will be extremely difficult to attract new investors as they are unable to offer earnings on the investment, at the moment they are offering a loss.  In addition to this, if the company financials do not pick up and they are forced to default there will be no return for the investors at all.

The Return on Sales ratio is currently at .39.  This is also below the industry average.  Such a low ratio indicates that the sales are not equivalent to the company’s current operating expenses.

However, on a positive note, the Current Ratio (an indication of the firm’s liquidity as measured by its liquid assets) of 1.71 shows some recovery and demonstrated that KKD have the resources to meet short-term obligations.

One potential source of this could be cash generated by financing activities that can help to offset the unrewarded investments in finance acquisitions.  However, this is a short-term option and will not significantly offset investors concerns.

KKD currently has a quick inventory turnover and averages 20 days.  This indicates that the company is managing their inventory well and is running an efficient operation with minimal waste.  In addition to this the turnover in receivable is 8 – 11 days which is much lower than one of their major competitors; Starbucks.  Their accounts payable turnover is also high relative to Satrbucks but this is probably a direct outcome of their franchise model.

KKD as an investment has received a great deal of negative publicity recently and this will undoubtedly have impacted their share price.  Accusations relating to their accounting practices and the potential over inflation of profit levels will undoubtedly have lowered investor’s confidence in the company and has also triggered a number of lawsuits.

Through analyzing their current financial status and taking into consideration their ongoing issues with the SEC, I would not invest in this company.

Reference Page

Krispy Kreme Doughnuts Inc KKD (NYSE) Full Description. Retrieved April 3, 2008, from Reuters Fundamentals

Web site: http://stocks.us.reuters.com/stocks/fullDescription.asp?symbol=KKD

Krispy Kreme History. Retrieved April 3, 2008, from Krispy Kreme

Web site: http://www.krispykreme.com/history.html

Krispy Kreme Quarterly Financial Report. (2007). Retrieved March 3, 2008, from Krispy Kreme

Web site: http://www.krispykreme.com/investorrelations.html

In module 2 case study I am to do the following understanding financial reports and continue to review the financial statements of Merck and Novartis to learn additional information. The emphasis of this Case is to review the income statement, balance sheet and computation of ratios. Review the financial statements for the companies and answer the following questions for the last reporting year: What components of stockholders’ equity does each of the companies disclose?

Merck & Company Inc

The components of the stockholders equity common stock (authorized and issued), other paid-in capital, retained earnings, accumulated other comprehensive loss, and treasury stock. Novartis International Ag. The components of the stockholders equity are share capital, treasury shares, reserves, and non-controlling interest. Do the companies have preferred stock shares outstanding? If so, what special features do these shares contain? Merck & Company Inc. Merck has authorized 20,000,000 shares of preferred stock in 2012.

All preferred stock from the AMI a merger in 1998 is being converted to either cash or shares of Merck stock. Novartis International Ag. Novartis did not report any preferred stock. Do either of the companies report treasury shares? If so, do the companies disclose the reason for reacquiring the shares? Merck & Company Inc. Yes Merck reported treasury shares; they reported the purchase of treasury shares on the balance sheet in the equity section and also on the summary of common stock and treasury stock transactions.

In this case no they didn’t disclose any reasons for reacquiring shares other than those from the merger. Novartis International Ag. Yes Novartis reported treasury share; No they did not disclose reasons for reacquiring shares Income Statement. What are the basic and diluted earnings per share for each company? Merck & Company Inc. Basic earnings per common stock $2. 03 Diluted earnings per common stock $2. 00 Novartis International Ag. Basic earnings per common stock $3. 93. Diluted earnings per common stock $3. 89

Have the companies reported any discontinued operations? Merck & Company Inc Merck has not reported any discontinued operations Novartis International Ag. Novartis reported no discontinued operations for 2012. Do the companies disclose any stock compensation plans? If so, are they reporting such plans under the fair value or intrinsic value methods? What was the value of compensation expense measured for any outstanding stock option plans? Merck & Company Inc. Yes they are reporting under the fair value method.

The value of the compensation expense measured was approximately $72 million to the holders and $4 million Merck common shares issued. Novartis International Ag. Novartis did not disclose any stock compensation plans Financial Ratios Compute the following ratios. Also, interpret and assess each group of ratios for the company. What type of story are the ratios telling the analyst? Profitability ratios: ? Gross profit margin = Gross income/sales. The gross profit margin is a financial ratio which is a measurement of a company’s manufacturing and distribution efficiency during the production process.

A company uses its gross income to fund such company activities as research and development and marketing, which are important for generating future sales. A prolonged decline in the gross profit margin is a red flag for possible impending negative pressure on sales and, ultimately, earnings. You need to know the trend of the company before you can make an analysis of whether or not the gross profit margin is good or not, in this case Novartis has a better gross profit than Merck. Merck & Company Inc. 8,739/47,267 = . 185 Novartis International Ag. 11,243/56,673 = . 198?

Net profit margin = Net income/ sale Net profit is the profit that is generated from all phases of the business, including interest and taxes. This is the “bottom line” that garners most of the attention in discussions of a company’s profitability. The net profit margin (net margin) compares net income to sales. A consistently high net margin is often indicative of a company with one or more competitive advantages. Furthermore, a high net margin provides a company with a cushion during downturns in its business. In this case Novartis has a better net profit margin than Merck.

Merck & Company Inc. 6,299/47,267 = . 133 Novartis International Ag. 9,618/56,673 = . 170 ? Return on stockholders’ equity = net income/ shareholders equity Return on equity (ROE) is equal to a fiscal year’s net income. It measures the rate of return on the ownership interest of the common stock owners and measures a company’s efficiency at generating profits from every unit of shareholders’ equity. Return on equity for most companies certainly should be in the double digits; investors often look for 15% or higher, while return of 20% or more is considered excellent.

Neither of these companies is great for their ROE but they are close, Novartis being higher. Merck & Company Inc. 6,299/53,020 = . 119 (12%) Novartis International Ag. 9,618/69,219 = . 139 (14%) Liquidity ratios: ? Current ratio = current assets/current liabilities The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. While Merck is able to pay back its debt, Novartis can pay its debt more easily and have a lot left over. Merck & Company Inc 34,857/18,348 = 1. 900.

Novartis International Ag: 124,216/30,946 = 4. 013 ? Quick ratio= current assets-inventory/current liabilities Generally, the quick ratio should be 1:1 or higher; however this varies widely by industry. In general, the higher the ratio is, the greater the company’s liquidity (i. e. , the better able to meet current obligations using liquid assets). The quick ratio is also known as acid test ratio. Both companies have a quick ratio but Novartis has a better quick ratio than Merck. Merck & Company Inc. 34,857-7,305/18,348 = 1. 501 Novartis International Ag. 124,216-6,744/30,946 = 3. 796?

Inventory turnover = COGS/Inventory The inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. Merck & Company Inc Inventory not specified on the 10K. Novartis International Ag. 18,756/6,744 = 2. 781. Leverage ratios: ? Debt-to-assets= Total debt/total assets Debt to asset ratio is a financial ratio that indicates the percentage of a company’s assets that are provided via debt. Novartis has a lower debt than Merck. Merck & Company Inc. 18,348 + 16,348 = 34,696 34,696/106,132 = . 327

Novartis International Ag: 5,945/124,216 = . 048 ? Debt-to-equity= total debt/total shareholders’ equity The debt to equity ratio, usually abbreviated as D/E, is a financial ratio indicating the relative proportion of shareholders’ equity and debt used to finance a company’s assets. Novartis used fewer loans to finance the company’s assets than Merck. Merck & Company Inc. 34,696/536,020 = . 065. Novartis International Ag. 5,945/69,219 = . 086 ? Times-covered ratio= earnings before interest and taxes/ interest Times interest earned (TIE) is a measure of a company’s ability to honor its debt payments.

The times interest earned ratio is also referred to as the interest coverage ratio. Merck & Company Inc. Only had a consolidated statements of income Novartis International Ag. Only had a consolidated statements of income What type of information do you find in footnotes to the financial statements? Additional information provided in a company’s financial statements. Notes to the financial statements report the details and additional information that are left out of the main reporting documents, such as the balance sheet and income statement.

This is done mainly for the sake of clarity because these notes can be quite long, and if they were included, they would cloud the data reported in the financial statements. Do you find the balance sheet, income statement or other measures such as ratios the most informative? Comment on the advantages and disadvantages of using ratios for analysis. I find that the balance sheet and the income statement have the standings of how the company did per quarter but the ratios show comparison of how they did. The ratios are good because you breakdown all the big numbers and just use percentages and analysis what is important.

The balance sheets show the breakdown of all the individual accounts consolidated so both are good. A disadvantage of depending on the statements are that they can mislead you indifferent ways, if you only look at the numbers and do not look at the foot notes you may make a bad decision. Bad information can also be given through the statements, although this is illegal people still do it and later on change it or say it was a mistake but you may not catch that. Ratios can also have disadvantages like if they are not computed correctly you may have the wrong percentages or you may have nothing to compare them to.

Introduction

In this report six different users of financial statements will be identified. Each user group will be described and the reasons why they use financial statements will be examined. Analysis and calculations of relevant and specific financial information will be performed to reflect the performance of the company, and how this is seen by the different stakeholder groups.The two companies I have chosen are J.Sainsbury plc and WM Morrison’s Supermarkets plc, hereafter known as Sainsbury’s and Morrison’s. This is because these two companies are two which have a large number of stakeholders who will be affected by the company’s financial statements. Sainsbury’s and Morrison’s also compete within the same sector and thus the financial statements and companies are obviously comparable, this will help with benchmarking to analyse the data .(Mclaney and Atril.2008). This will help to determine, along with the relevant analysis and calculations, which stakeholders will be more pleased with the financial statements out of the two supermarkets. As of May 2014, Morrison’s had 11% of the market, and Sainsbury’s 16.6% (Garner.2014).

The financial statements we will be assessing are income statements and balance sheets. These are the two statements which are of greatest importance to the majority of stakeholders. I have attained the most recent financial statements from the two companies from their recent annual reports. This report will use financial ratio’s to assess the profitability, efficiency, Liquidity, Financial Gearing and Investment potential within Morrison’s and Sainsbury’s.(Mclaney and Atril.2008.).

Boards of Directors

The owners and boards of directors of both Sainsbury’s and Morrison’s would use financial statements to review the performance of management and assess the overall performance of the company. For the smooth operation of the organisation, the managers and owners also need the financial reports to make essential business decisions. For example the current debt to equity ratio is important in deciding the amount of long term capital that would be required to be raised for making certain business decisions.

As can be seen Sainsbury’s debt to equity ratio is 63.7% with Morrison’s at 55.9%, a difference of 7.8%. This ratio is one of the key set of 10 identified by Laurent (2006) in being able to predict a firms performance. This thus means that they are financing their growth more by debt than they are by their current assets than Morrison’s. However this is not necessarily a bad thing, and this could mean that they growing more than if they did not utilise this outside financing. If this increases earnings by a greater amount than the debt interest that would be incurred then it is definitely beneficial to do so, thus the board would be pleased with what they have seen from the financial statements.

Shareholders

Shareholders receive a set of financial statements as a right, and are the only stakeholders to do so. The shareholders interest will be in what the company is doing with the money they have invested, and whether it is making a profit or loss. If it is profitable, they will want a return in the form of dividends, so they will be concerned with the level of dividends the company is paying out year on year and the potential for future profits and dividends. If profit levels and dividend pay-outs diminish noticeably, or if no dividends are paid out because the company has made a loss, then they will consider selling their shares and investing in something else which will give them a higher return. Obviously operating profit margin is also needed to measure overall performance and this can be calculated as follows.

Supermarkets usually operate at low operating margins, so these results are not wholly surprising (McLaney and Attril.2008) Morrison’s extremely poor performance this year is down to incredibly high administrative costs, this could be seen as possibly due to a new initiative or launch of service which required high costs to get this off the ground, and therefore this may pay dividends in the future. Thus it will be imperative to see how they will perform in the next year without these high administrative costs. Sainsbury’s operating profit margin can be compared with the previous year to see how they are progressing, and this was 3.8%. Thus their net profit margin has increased and the shareholders will be pleased with this performance as it could increase shareholder dividends.

Banks

Banks are extremely interested in a companies such as Sainsbury’s or Morrison’s financial statements. For example if a company has an overdraft or a bank loan, then the banks need to make sure that a company can afford to pay these loans it owes off (Palepu and Healy.2008). If a company is applying for a loan, similar considerations apply, although the bank would in addition insist on looking at more up to date information than the last set of statutory accounts as these could be rather out of date. The banks would calculate this by with the acid test ratio. This shows the company’s ability to pay its current liabilities from liquid assets.

Supermarkets by nature have very low acid test ratio scores due to some stock on their shelves not selling as quickly as they would like. However Morrison’s at 0.2:1 is much lower than the company would be wanting to have, whereas Sainsbury’s at 0.5:1 is relatively healthy for a company that operates as a supermarket.

Creditors

A company’s trade creditors and suppliers will also obviously be interested in a companies financial statements such as the balance sheet and income statement. Such stakeholders will be concerned with whether the company can pay regularly for its purchases from them, so they will have an eye to the cash position of the company – its liquidity. They will also be interested consequently in any items in the accounts which may affect this liquidity such as bank overdrafts or loans, as such items would usually indicate cash problems in the company which may render it an insecure buyer for the future.

Creditors are also extremely interested in creditor days. This is the average payment period to payables expressed in days. This can be calculated by the following formula.

Trade payables x 365
Purchases

Sainsbury’s (?m)Morrison’s (?m)

2272 x 365
16606

= 50 days
2692 x 365
22562

= 44 days

As can be seen, Sainsbury’s creditors will be the more pleased out of the two sets of stakeholders for both supermarkets. This is because they are paid on average six days faster than Morrison’s creditors and thus will have a more efficient flow of cash. This could mean building a better relationship with these creditors. However Morrison’s may also be pleased as it means they are able to hold on to this cash for longer and maximise cash flow with longer creditor days payable.

Trade debtors/customers.

These persons would be interested in the company’s likely continuance into the future as a secure source of supply, and so would look for any items affecting this, such as production difficulties, sales price increases etc.

These will also be most interested in debtor (receivables) days, this is the Average collection period for receivables expressed in days. It is calculated as follows.

Trade receivables x 365
Sales Revenue

Sainsbury’s (?m)Morrison’s (?m)

433 x 365316 x 365
23949

= 7 days17680

= 7 days

Here both Sainsbury’s and Morrison’s debtors will be equally as pleased when analysing the financial accounts for both of these companies. This is because they both receive a similar amount of time in which to pay their debts. Equally both of the supermarket chains will be relatively pleased with this as they will be in a similar position to each other in receiving the money from debtors. Similarly this is much shorter than the time it takes both to pay their creditors, and thus their cash flow efficiency will be maximised.

Competitors

Competitors will also be interested in the financial results of a rival in the same industry sector to see whether its results are better or worse than its own, whether it has brought new products to the market place and how these have been doing (Palepu and Healy.2008). Competitors of Sainsbury’s such as Asda and Tesco may also be interested to compare things such as costs of goods on the income statement to compare this to their own performance. A rival’s bad result, when its own is good, would enhance performance in the eyes of its own shareholders. A rival’s similar adverse performance may reflect that both are hit by the same business factors.

In the retail business something that both Morrison’s and Sainsbury’s would be interested in seeing is how their inventories turnover period compares with that of their rivals. It can be calculated as follows.

Inventories x 365

Cost of sales*

Sainsbury’s Morrison’s

1005 x 365852 x 365

22562

= 17 days

16062

= 20 days

Here Sainsbury’s will have the more pleased boards of the two supermarkets when analysing their competitors in terms of inventory turnover. This is because on average they manage to turn over their inventory 3 days quicker than Morrison’s. This demonstrates that they have a more efficient stock system and are selling their products at a faster rate, which could lead to a better overall performance.

Conclusion

As can be seen, a range of different stakeholders have reason to be interested in a companies financial statements. These stakeholders range from being interested in their own personal gain, those such as Shareholders, as well as being interested in how it impacts upon other stakeholders, through the analysis of both debtor days and creditor days.

Financial reports are important for all different stakeholders so they can decide whether or not it is beneficial to be involved with a certain company, they are always interested in the going concern of the company. It is important for numerous reasons that these stakeholders have access to the accounts to gain clarity and for the continuation of the working relationship with companies such as Sainsbury’s and Morrison’s. It is therefore important that the accounting is accurate and up to standards for these different stakeholders of financial statements, it is also useful for comparison of companies and as can be seen from the analysis Sainsbury’s stakeholders will be more pleased with the financial statements than Morrison’s.

Bibliography

1. Garner, E. (2014). Kantar, UK grocery growth at lowest level for 11 years, [Online]
2. http://uk.kantar.com/consumer/shoppers/070514-kantar-worldpanel-uk-grocery-share-data-april-2014/ [Accessed online on 01/11/2014]
3. J.Sainsbury’s plc, 2014. Annual Report and accounts 2013-2014. [Online]. http://www.j-sainsbury.co.uk/media/2064053/sainsbury_s_annual_report_and_ accounts_ 13-14.pdf. 2014. [Accessed online on 01/11/2014]
4. Laurent, C.R. Improving the efficiency and effectiveness of financial ratio analysis. Journal of Business Finance and Accounting. [Online] Vol 6(3). 2006. p401-413.
5. McLaney, E. J., Atrill. P. (2008). Accounting and finance : an introduction. Fourth edition. Harlow: Pearson.
6. Palepu, K. Healy, P. (2008) Business Analysis and Valuation: Using Financial Statements. Mason:Thomson Learning
7. WM Morrison’s Supermarkets plc , 2014. Morrison’s Annual Report 13-14 [Online]. http://annualreport.marksandspencer.com/downloads/MS_AR2014_Annual_Report.pdf [Accessed online on 01/11/2014]

Synopsis and Ratio Explanations

It is very important for organizations to know how well they are doing financially when most efforts are being made to serve clients. It is easy to forget that pouring money into a problem will not fix it unless revenue flows continue or are increased and expenses are controlled. Some of the easiest computations can be made with information retrieved from balance sheets and income statements provided by accountants. Ratios such as the current ratio, long-term solvency ratio, contribution ratio, programs and the expense ratio, general and the management expense ratio, fund-raising and expense ratio, and revenue and expense ratio can provide a picture of where a company stands now compared to where it was in past years and what may need to be done in the future.

The current ratio gives a picture of the liquidity of an agency; the amount of cash and other assets that can be easily accessed for use to pay expenses. The current ratio is expected to be over 1. 0; if it is less, the agency may have problems meeting its obligations. In this scenario, each year the ratio has shown that XYZ is getting closer to 1. 0; 2002 reflected. 75, while by 2004 it has increased to  90. This means that while it still may make it difficult to pay obligations, the situation has gotten much better. The purpose of the long-term solvency ratio is to provide insight into how well an agency will be able to pay their annual expenses as they come due. The result of the ratio should be at least 1. 0, but the higher the number the better; if it is less than 1. 0, the viability or likelihood of existence is questionable. In 2002, a figure of 1. 26 was acceptable, but in 2004 it has risen to 2. 06; this is a good figure and shows that the organization is improving in its financial planning and will more than likely remain viable. The contribution ratio is used to show to what extent an agency is dependent upon its main funding source. It is best for an organization to have its revenues spread through many sources rather than becoming dependent on only one or two which may or may not fund them in the future. If the figure calculated as above. XYZ Corporation needs to look for more sources of funding. Their contribution ratio is. 53 for 2002 and has remained stable in 2003 and 2004 at . 51. While their dependence has dropped a little bit, they are still working in the danger zone.

The programs and expense ratio is based upon a standard set by the National Charities Information Bureau (NCIB). This agency provides the standards which show whether or not a program is making or not making the grade as far as how much of program expenses are in comparison to overall expenses. It is expected that this ratio is a minimum of  60. In 2002, XYZ Corporation produced a ratio of 60; in 2003 and 2004, this number raised to  66. The beginning figure is acceptable, but the rise in ratios for 2003 and 2004 is even better. The general and management expense ratio identified how much money is spent on the administration of the agency in comparison to the total expenses. If the calculated figure is greater than  35, the organization should begin to cut the costs related to administration. XYZ Corporation has consistently brought their administrative costs down. Beginning in 2002 this organization had a 40 ratio, which is unacceptable; then in 2004 a figure of. 29 which is well within the acceptable range. The fund-raising expense ratio basically tells how much money is being spent related to the total expenses in order to raise revenues to be used by the agency. A ratio of over is a sign that more money is being spent than necessary to raise the funds needed by the agency; this means that less can be spent on essential services. In 2002, XYZ Corporation’s ratio was 1, which is within acceptable limits; in 2003 and 2004, they reduce their amount still farther to  60. While this rate is very good, it is important to be aware that cutting this ratio too close may actually limit the revenues of the agency; some money needs to be spent to identify and court some funding sources or those potential revenues may be lost.

The revenue expense ratio is a very important figure in understanding where an organization stands. This ratio informs the reader whether the agency is making money, losing money, or breaking even. It gives a starting point for making decisions about whether a program should continue, if it should be re-evaluated, or if it should be discontinued. The financial management team should be held accountable for the figures they produce and be able to explain shortfalls or positive changes. The acceptable figure for this ratio is 1. 0 or greater. In 2002, this agency had a ratio of . 8, which is just below acceptable. Through hard work, it appears that they have raised this number to 1. 11. This is a big change and shows that XYZ is working to make their organization more stable. Overall, based on these figures, this corporation is taking positive steps towards making their agency viable, effective, and efficient. All of their ratios reflect the movement towards acceptable levels and if history predicts future behavior, they will continue to grow and be able to provide services for their clients without fear of insolvency.

They do need to work on getting more grantors instead of having one major source of revenue, but even now they have increased to two major donors. This in itself is a major accomplishment. XYZ Corporation Fixed Costs, Variable Costs, and Break-even Point Comparison of Years 2002, 2003, and 2004 (respectively) 2002 Fixed Costs for 2002 in Expenses: Rent and Utilities

Variable Costs for 2002 in Expenses: Other Expenses $117,903. 00

Rounded to $660,008. 00 Per Appendix D What is the BEP for the program since we see that they were in the red for the year?

• Total Fixed Costs = $525,000
• Total Variable Costs = $660,008

Revenue per Customer = Total Revenue/Total Customers $1,165,065. 00/5962 = $ 195. 42

Variable Cost per Customer = $660,008/5962 = $110. 70

BEP = Total Fixed Costs/ (Revenue per Customer – Variable Costs per Customer)

BEP = $525,000/($195. 42 – $110. 70) = $525,000/ $84. 72 = 6196. 88

Rounded to 6197 2003

Fixed Costs:

• Rent and Utilities $150,000
• Telephone 24,000 Management and Other 371,101 $545,101
• Variable Costs Payroll and Benefits $520,069
• Supplies 171,623 (rounded up the $. 77)
• Other Expenses 79,888 $771,580
• Break-Even Point Total Fixed Costs = $545,101
• Total Variable Costs = $771,580

Revenue per Customer = Total Revenue/Total Customers $1,244,261. 00/6821 = $182. 42

Variable Cost per Customer = $771,580/6821 = $113. 12

BEP = Total Fixed Costs/ (Revenue per Customer – Variable Costs per Customer)

BEP = $545,101/($182. 2-113. 12) = $545,101/ $69. 30 = 7866

Rounded to 7,866 because there is no way to have a partial person and at 7865, we will not make break-even. 2004

Fixed Costs:

• Rent and Utilities $150,000 Telephone 24,000
• Management and other 445,819 619,819
• Variable Costs: Payroll and Benefits $915,787 (rounded down)
• Supplies 320,526 (rounded up)
• Other Expenses 115,999 $1,352,312
• Total Fixed Costs = $619,819
• Total Variable Costs = $1,352,312

Revenue per Customer = Total Revenue/Total Customers 2,191,243/11,822 = $185. 35

Variable Cost per Customer = $1,352,312/11822 = $114. 39

BEP = Total Fixed Costs/ (Revenue per Customer – Variable Costs per Customer)

BEP = $619,819/($185. 35 – $114. 39) = $619,819/70. 96 = 8,735.

Rounded to 8,735

Budgeting

There are three basic types of budgeting that apply to human service organizations; line item, performance, and program budgets. Deciding which method will be best for a given agency depends on what information they wish to retrieve and from a perspective they wish to look at revenues and expenditures. By listing the advantages and disadvantages of each method, a financial management professional or Executive Director may make the appropriate decision on which format to use. Line budgeting is the most utilized budgeting method because it simplifies how money is allocated and how well each program is controlling expenditures. Because of its simplicity, employees, financial managers, and laymen can readily identify key pieces of information. Financial control is the basic purpose of this type of budgeting. Line item budgets are easy to prepare, easy to justify, and easy to understand. They provide specific information as to where the money is allocated and for what purposes.

There are two major disadvantages to line-item budgeting; lack of relationship between the budget, objectives, and the outcome of the program. The second disadvantage is that there is no real way to estimate what the future holds; line item budgets are always based on historical data which may not properly reflect the current situation. The purpose of “performance budgeting is to relate agency expenses to programs by determining (a) a program output (or unit of service) performance measure, (b) the total program cost, and (c) the cost per output of service.  The advantages of this type of budget program are similar to program budgets; with the difference being the concentration of quantity over quality. Being able to know how much a particular output cost gives managers a real picture of how much is being spent to provide client services. If adjustments need to be made, they can do so as the program advances or declines in services rendered. This method addresses not only how a budget will be broken down for departments, but also the efficiency of what departments are meeting their budgetary goals while serving the most clients (based on how outcomes are represented).

Fixed costs are added to the budget line items. A disadvantage of performance budgets is that while they do show how many clients are services and at what cost, they do not concern themselves with quality. If the quality of service is not a concern then it shows people as numbers, rather than as important beings we are supposed to serve. The other major disadvantage is that calculations can be difficult and require more computer input than the basic line-item type budget. While many calculations can be done by hand, many also need more complex programs to provide appropriate data. Program budgets are concerned with an agency’s activities rather than its expenditures. The cost per outcome is the main concentration of the financial manager and gives information about the success or failure of the program. This is perhaps the best type of budgeting for agencies that need to know whether they should continue, reorganize, or discontinue their program. The major advantages to this type of budgeting are that it is easier to evaluate programs since costs are tied to results, priorities may be changed quickly and with a minimal amount of work, and programs are broken down into smaller, more manageable budget units.

This type of budget concentrates on effectiveness, not just efficiency. The disadvantage is that it is difficult to get all to agree on what an acceptable outcome will be for budgetary purposes. The fact exists that if an outcome is only defined as a specific ending, major positive changes in a client’s case may be overlooked as not an outcome. Another disadvantage is that the analysis can be time-consuming and difficult. To understand the data which is produced, most people would have to have an accounting background or someone who can explain the reports to them. Fund-Raising—Traditional versus Non-Traditional Organizations from everywhere are begging for funding to keep their programs going and expand services they can offer to their clients. Traditional sources such as government grants, private donor grants (individual or corporate), annual support mailings, and the United Way may offer some assistance, but the reality is that money is a limited commodity and all agencies need more of it.

While each type of traditional funding may allow only certain types of programs or projects which target specific groups based on acceptance criteria, there are others that give general funding. The process to receive these funds may involve grant writing, volunteers to send out mailers, and liaisons with other agencies; paperwork and attention to detail are very important in attaining these types of funding. Non-traditional methods arise from many different styles and perspectives. While the “chunks” of money may be smaller, they do have benefits that more traditional methods offer. We all hate telemarketers, but how would we feel about children from our church calling about a pizza sale to benefit their summer program? The pizzas could be bought in bulk under a discount program that companies offer and then picked up at the church on a given day. Most would probably spend money to help people they know earn money for a good cause. A second non-traditional method of fund-raising is to the community rummage sale. Most people have lots of good “stuff” that they think has value but have little time or inclination to have a yard sale. By donating these goods to an organization to sell at a community rummage sale, individuals may be given a donation credit on their taxes, clean out their garages, and help the agency make much-needed money. Funds that are raised in this manner are not paperwork intensive (in fact, other than writing up posters, there is none) and funds are not required to be spent on an identified program or project.

Conclusion

After reviewing the financial documents and ratios of XYZ Corporation, it is clear that they are making a solid business decision on how their money is spent and how revenue is raised. Most calculations show that their situation has improved since the initial reports of 2002. If history is any indicator of what will follow in the future, they should be able to sustain their growth and perhaps even expand. They have increased the number of clients served while at the same time keeping their budget under control. The only area that really needs improvement is the revenue dependency aspect of their budget. Being too dependent on one funder can spell disaster for any organization. XYZ has made headway in this department by getting the majority of their funds from two agencies instead of just one, but it would serve them to continue to diversify their revenue sources. Hopefully, this corporation will continue to provide quality services to their clientele far into the future and continue to remain solvent.

Reference

1. Martin, L. (2001). Financial management for human service administrators. Needham Heights, MA: Allyn & Bacon.

For accounting information to be useful for financial judgments decisions, it must have some characteristics. They include Relevancy; this is the capacity of the information generated to make a difference in decision-making. Timeliness; information should be relevant and should be produced during relevant time containing information in market prices prevailing at that time, if for example its prepared after lets say 5 years it would be irrelevant. Reliability; the information prepared should be reliable for decision making i. e. they are accurately measured.

From the financial statements prepared by the company, they contain al the above requirements for the information to have relevancy but the challenge contains some sources of income which u cannot estimate its future with certainty. These include donations, grants and sponsorship. The charity ha received grants, donations and sponsorships of unrestricted funds of 153,000 restricted funds of 788,000 endowment fund of 368,000 in the year 2007 which total to 1309,000 while in year 2006, it was 1,192,000. Although there is a decrease in this form of incoming resources, it is certainty as income is not known with a reasonable degree. This form of income was received from various people for various reasons or activities some of which are not ongoing.

The donors for these activities include American friend of Dulwich 246,000 Dr. Mortimer & Theresa Sackler Foundation 195,000, Friends of Dulwich Picture Gallery 82,000Estate of Edith Callam 30,000 Fortis 70,000 , 1811 club Defensans circle and other patrons 62,000, In memory of Bill and Anita Greenoff 40,000, The City Bridge Trust 40,000, London Borough of Southwark 28,000, Bank of America 25,000, Linbury trust 21,000, Concheme charitable trust 17,000, Estate of Seumas Finn 35,000, Lillian jean Kaplan foundation 13,000, Dulwich Village Preservation Society 10,000, Other donations for education 61,000, Other donations for Exhibitions 36,000, Other donations for Collections 44,000, Donations by visitors to the Gallery including gift aid 2,000, Other sponsorship and donations 30,000.

All this donations are based on decisions of the donor in question and the gallery can not estimate the amount. From the information provided above about donations, grants and sponsorships, it shows it is from a wide variety of contributors who have no contractual commitment to continue donating to the charity. It is very difficult to rely on such kind of information in decision making about expenditure. Such income is recognized as to when t is received it can not be accrued before actual contributions are made.

If the sponsor, grantor or donor indicates the purpose, the period he wants the money to be used, then it will be recognized at that period of use and it becomes very difficult to decide whish information should be used about the income for decision making. Therefore, the charity trustee cannot with a degree of confidence make a decision relating to grant, donations and sponsorship because of their nature. Other sources of incoming resources for the charity can be estimated with certainty and prudence.

Income from shop sales, catering and gallery hire can be estimated and they are seen to join from time to time. In the year 2007 shop sales were 256,000 catering and gallery hire were 60,000, while in the year 2006 they were 210,000 and 67,000 for shop sales and catering respectively. This form of income can be estimated because it relates to activities which are in control by the management. They have also income from charitable activities which is uncertain since it is not easier to estimate the income from education, exhibitions sales, admission charges and other collections.

However, if the charity management manages the activities properly, they will be bale to estimate the income from this system. Most exhibitions depend mostly on the marketing ability of the firm in question. The same case relates to expenditure of this charity. Expenditure for designated or restricted income is to be used for designated expenses. Such kind of expenditure at times becomes uncertain since you cannot estimate how much income you are going to have at the end of the year since most of the income is from individuals whom you cannot control.

In general, there is a great improvement in the financial performance of the fund since the income within is increasing. In order for the financial statements of this charity to have reliable and useful information, some information is necessary. The information that is required includes the statements of cash flows. The statements of cash flows is a statement which reports cash receipts and payments in the period of their occurrence classified as operating, investing and financing activities. It provides with information about non cash items that are in the income and expenditure account.

It has to explain the changes in the balance sheet and the actual free cash flow in the organization. For the charity, this will include; donations received, sale of property, purchase of property and any other donations given or charities issued. The main key performance measure in this statement is cash fro operations which is the cash effect of all transactions that are involved in the day-to-day running of the charity. It is reported directly or indirectly in reconciling the financial statements.

The other information required is the foot note in the accounts. The foot notes provide information that argument the financial statements. They are; integral part of the financial statements and it explains actities such as accounting methods used, assumptions made, estimates used to develop the information reported in the financial statements. The footnotes assist the users to improve assessments of the amounts, timing and uncertainty of the estimates reported in the financial statements. Footnotes provide additional disclosures which assist in decision making.

In this case of Dulwich, we need a footnote for contingencies and pledges made by donors. This will assist in decision making. We should also have prospective information that discusses the significant effects of currently known trends, events and uncertainties among charities. It should also provide us with information on how the activities of the fund are used. They should provide policies on the charities they are involved in to persist in decision making. The information about the auditor is also necessary.