MANAGERIAL ACCOUNTING

Managerial accounting

Managerial accounting

Williams and Sonoma Plc

Question 1:

a)

2007

2008

2009

£000

£000

£000

Sales

850

995

1,202

Cost of sales

329

378

536

Gross profit

521.3

617.7

665.8

Expenses

28.1

-4.5

190.7

Profit before interest & taxation

157

201.7

-9.9

Interest

0.7

6

6.2

Taxation

46.1

60.5

11

Profit for the year

110.2

135.2

-6

446.1

442.8

438.1

Assets

Non-current assets

Property, plant, and equipment

326

364.8

383.3

Current assets

Inventory

149.8

268.6

262.6

Trade receivables

137.2

169.2

187.2

Cash

136.7

150.6

292.6

423.7

588.4

742.4

Total assets

749.7

953.2

1125.7

Liabilities

Current liabilities (trade payables)

330.4

436.2

546.8

Non-current liabilities

22.4

21.7

35

Total liabilities

352.8

457.9

581.8

Net assets

396.9

495.3

543.9

Equity

Ordinary share capital

0.2

0.2

0.2

Preference share capital (£1 each)

0

0

0

Share premium account

167.3

174.3

175.9

Retained earnings

229.4

320.8

367.8

Total equity

396.9

495.3

543.9

2007

2008

2009

Liquidity Ratio

Current Ratio

1.28

1.35

1.36

Quick Ratio

0.83

0.73

0.88

Asset Turnover Ratios

Recievables Turnover

6.20

5.88

6.42

Avrage Collection Period

58.92

62.04

56.87

Inventory Turnover

2.20

1.41

2.04

Inventory Period

166.19

259.57

178.92

Financial Leverage Ratio

Debt Ratio

3%

2%

3%

Debt to Equity Ratio

6%

4%

6%

Profitability Ratios

Gross Profit Margin

61%

62%

55%

Return on Assets

15%

14%

-1%

Return on Equity

28%

27%

-1%

EPS

0.25

0.31

-0.01

B)

Liquidity Ratios

The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can by easily bought or sold, are known as liquid assets. Also,The ability to convert an asset to cash quickly. Also known as "marketability". There is no specific liquidity formula, however liquidity is often calculated by using liquidity ratios.

-Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations.

The Current Ratio formula is:



Williams and Sonoma over the three years has been able to generate 1.28, 1.35 and 1.36 times than its short term obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. But here Williams and Sonoma is doing sufficiently well.

-Quick Ratio

An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company.

The quick ratio is calculated as:



The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash. In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company's short-term financial strength. Not given the nature of the business of Williams and Sonoma, its difficult to interpret this ratio. According to the limited information given here, 0.83, 0.73 and 0.88 is Williams and Sonoma's quick ratio which well below 1 constantly over the three years.

Profitability Ratios

A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. Some examples of profitability ratios are profit margin, return on assets and return on equity.

-Return on Equity

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders ...