Financial and Management Accounting Case Study Example | Topics and Well Written Essays - 3750 words

Financial and Management Accounting - Case Study ExampleThe rise in inventory levels is of fact significance and it is suggested that if a proper stock management plan was put in place, the party would be able to improve its liquidity and cash black market positioning. It is also suggested that alternate sources of funding for the Companys expansion, such as debt finance and/or leasing of assets as opposed to relying predominantly on equity finance may founder a favourable impact on cling to Ltd., in terms of liquidity and otherwise.Foster Ltd. has gone through rapid expansion over the dickens years that make up the subject matter of this report. This is evident from the financial statements of the Company as seen from the fact that revenue has grown by 43.75% and the investment in machinery has increased by 60% in 2006. The Company has also increased its long term funding by drawing a 1 Million add as sanitary as making a share issue.This expansion has reaped benefits in te rms of profitability however the liquidity and cash flow position of the Company has deteriorated. The directors themselves have felt the strain and the Cash Flow Statement prepared for 2006 clearly reflects the problem. The financial statements show further signs of the cash shortage and these go out be discussed below.Overtrading is a likely cause for the Companys current unfavourable situation. This refers to the fact that the Company has expanded its sales revenue quite rapidly without securing the additional gold necessary to support the expansion.This report looks to find the underlying causes of the liquidity problem by analysing the available financial statements. Any potential causes found will be discussed and possible remedies suggested. In addition, other ways in which the liquidity position of the Company can be improved will also be considered.Foster Ltd.s Current Profitability &Liquidity/Cash flow Position As mentioned above, the profitability of Foster Ltd. has see n a commendable increase. The Gross Profit Ratio (GP Ratio) of the Company has increased from 21.88% in 2005 to 26.09% in 2006 (see Appendix). This is a significant rise. It must be noted that just because revenue increases, profitability does not increase as the damage of sales would have increased along with the revenue. However, in Foster Ltd.s case, the cost of sales has increase in a proportion quite considerably slight than that of revenue (36% as compared to 47.35%). It is because of this difference in proportions that Foster Ltd. is exhibiting higher profitability levels. A likely reason for cost of sales increasing by a lower percentage is the achievement of economies of scale. As Foster Ltd. expands and increases production, its cost per unit decreases as it begins to enjoy the benefits of bulk discounts in raw material purchases, as well as being able to spread overhead and other improve costs over a larger number of units thereby reducing the fixed cost per unit.Along with its GP Ratio, the Total Profit ratio has also increased from 8.75% to 8.99% (see Appendix). This may not be a sizable increase scarce is definitely notable. The reason for the increase in the GP Ratio not being followed through to the Total Profit ratio is that the operating expenses, and the finance and levy costs to a lesser