SCENARIO 1

TASK 1
TASK 2

Transaction a
Transaction b
Transaction c
Transaction d
Transaction e
Transaction f
SCENARIO 2
1. Calculating financial ratios for the year 2021
Source: Atrill & McLaney (2017)
2. Compare the performance of Uma Ltd. between 2021 and 2020

First, efficiency ratios gauge a company's capacity to manage its assets and how
effectively it uses them to generate income (Nickolas, 2021). Since the total assets
turnover ratio is stable, the corporation won't need to be concerned about it in 2021. The
fact that the average inventory turnover period ratio doubled from 2020 to 2021 may
indicate that processes need to be reviewed or that slow sales need to be addressed. To
assess whether the issue was caused by a decrease in sales or a change in inventory
management, a manager needed to examine sales data (My Accounting Course, 2019).
The average settlement duration for trade receivables ratio grew somewhat, but this is
insignificant to the business since most businesses collect their debts within 30 days. If
receivables are collected within a reasonable and reasonably short time frame, the
corporation has time to fulfill its obligations (Kenton, n.d.). The ratio of the average
settlement duration for trade payables has more than halved, which indicates tardy
payment to suppliers for credit purchases. This can be a result of favorable borrowing
terms, or it might be an indication of cash flow issues and a consequent deterioration in
the financial situation (Corporate Finance Institute, n.d.).

Second, profitability ratios determine whether a business can turn a profit from its sales
or activities, balance sheet assets, or shareholders' equity (Hayes, 2022). A decreasing net
profit margin ratio indicates that the company's cost structure or pricing methods are
inefficient. In addition, the gross profit margin ratio fell, a sign of ineffective business
operations, insufficient sales, or subpar goods. The corporation also expresses worry over
the management's unprofitable actions and the effectiveness of the utilization of corporate
capital. A declining ROA is a warning indicator that the firm may be in trouble because it
suggests the corporation may have overinvested in assets that haven't increased revenue.
Declining ROE indicates that the business is getting less effective at generating profits
and raising shareholder value.

An essential group of financial indicators known as liquidity ratios is used to assess a

debtor's capacity to settle current debt commitments without the need for outside cash
(Hayes, 2022). The company's ability to pay short-term debt or debt that is due within a
year has increased, as seen by a current ratio that has risen since 2020. A rising quick
ratio indicates that a business can generate cash more swiftly in an emergency.

Finally, a solvency ratio is a crucial indicator that prospective business lenders

frequently use to assess a company's capacity to repay its long-term debt (Hayes, 2022).
The ratio of debt to equity has risen somewhat, but this is not a reason for concern for the
company because it shows that the overall amount of debt held by the company is less
than the equity. When compared to 2020, the company's interest cover ratio fell
precipitously in 2021, indicating that debt-related costs are burdening it and leaving less
money available for other uses.
3. Evaluate the performance of Uma Ltd. over time using financial ratios

a) Efficiency ratio

The total assets turnover ratio of Uma Ltd. has been more than one for all three years,
with not much variation over time. This is a good sign because it shows that the business
can make enough revenue to support itself. A big issue is that the average inventory
turnover period ratio has increased over time. The main reason is the COVID-19
pandemic, which started at the end of 2019 and resulted in many people being
quarantined, as well as a drop in demand for eating out. Significant food stores like Uma
Ltd. are left with low sales and a large backlog of inventory. When the pandemic
situation is more stable in 2021, human demand will also rise. As a result, the average
inventory turnover period will also rise, demonstrating that firms sell their products
rapidly and that inventory does not lie around for long periods of time. However, it is also
bad to leave this index too high because it indicates that there is not much inventory in
the warehouse, which increases the likelihood that the business won't have enough
products to supply if market demand increases suddenly. As a result, it will be simple to
lose clients and be taken over by rivals. The average settlement time for trade receivables
over time is also relatively brief, averaging just 6-7 days. This is a good point that
demonstrates how quickly the business collects payments. The drawback of this, though,
is that it may indicate that credit requirements are excessively stringent. If the scenario
persists, the consumer might find other service providers who provide more flexible
terms of payment. Comparatively to 2021, the average settlement duration for trade
payables has been practically cut in half. Even if a declining ratio might signify a
corporation is in trouble financially, that isn't always the case. It's possible that the
business has negotiated improved terms for payments that allow it to make payments less
frequently without incurring any penalties.

b) Profitability ratio

The net profit margin shows how much of every dollar a company receives transform
into profit (Murphy, 2022). By 2021, Uma Ltd. will only have about 1.7 dollars, down
from having 2.3 dollars left for every dollar in sales revenue. This would not seem to
have much of an effect on a small scale, but over time and depending on the size of Uma
Ltd.'s business, a loss of even just 0.5 dollars might amount to millions of dollars. The
gross profit margin drops with time, and a for-profit corporation faces serious challenges
as a result. When there is minimal diversity between competing goods or services,
steadily declining profit margins may be a sign of a highly competitive market and
commoditized products (Beaver, 2020). The cause can be more sales and promotions
carried out during a sales cycle. The price of materials could increase, which is another
factor. The business may need to alter its growth strategy if the gross profit margin
consistently drops over time. As assets increase over time, ROA declines since returns do
not rise proportionately. This indicates that the efficiency of your assets is decreasing.
Lower margins, the stock turnover that may also be connected to lead times, costs that
may prevent larger margins, the nature of the product (service vs. good, high R&D vs.
low R&D), and other factors may all contribute to this. In addition, because the
company's use of shareholders' money is neither reliable nor efficient, ROE also fell
precipitously between 2019 and 2021. To boost productivity and earnings for investors,
management must think about modifying specific methods.

c) Liquidity ratio

The business benefits from Uma Ltd.'s liquidity when both the current ratio and quick
ratio tend to rise over time. The company's current ratio fluctuated in 2019 and 2020 but
grew to four times in 2021, which is encouraging. Additionally, there has been a
noticeable rise in the quick ratio over time. In actuality, the more assets this corporation
has, the greater its current ratio and the fast ratio becomes. As a result, more people have
faith in the company's ability to settle its debts.

d) Solvency ratio

Uma Ltd.'s debt-to-equity ratio declined slightly in 2020 but then rose to the previous
value in 2021. This demonstrates the Enterprise's capability of being financially self-
sufficient, the fact that it does not need to borrow excessively, which lessens the strain on
available financial resources for businesses, as well as the ability to cut back on interest
costs, late payment fees, etc., all of which improve business outcomes. Despite the fact
that this figure is still favorable for the company, it still predicts a negative outcome. If
this ratio keeps rising until it reaches almost 1, it means that the entire amount of debt
held by the company exceeds its equity, raising the possibility of bankruptcy and
decreasing its creditworthiness. The interest cover ratio in 2021 plummeted 95 times
compared to 2020 while this coefficient in 2020 only decreased by 3 times compared to
2019. When this coefficient is above 2, businesses are still considered to have a positive
ability to pay interest on loans. The company will need to reevaluate this significant
decline, though.

4. Evaluate financial statements to assess organizational performance

Overall, the ratios for profitability and efficiency have decreased below the industry
standard. However, all ratios have barely altered aside from the average inventory
turnover period (which has nearly doubled) and the average settlement period for trade
receivables (decreased by almost half). Even though Uma Ltd.'s profitability index is
thought to be consistent when compared to the industry's average level, the company's
performance isn't all that impressive in terms of efficiency. In terms of liquidity ratio, the
current ratio during the past three years has been higher than 1 and above the industry
average. Companies in this industry struggle to pay their short-term liabilities because
their quick ratios are below the industry average of one. This coefficient for Uma Ltd. in
2019 and 2020 is likewise less than one, but it is still higher than the industry average,
and it has significantly improved in 2021 (1.14 times). This demonstrates Uma Ltd.'s
financial stability compared to its competitors. In terms of solvency ratio, all of the
indices are below the industry average, with the exception of the interest cover ratio,
which has been notably rising from 2019 to 2020. The company's debt management is
efficient, as evidenced by the fact that its debt-to-equity ratio has been lower than the
industry average for all three years. This information helps investors understand the
company's financial situation and financial security and allows them to make decisions
that are in their best interests. Despite Uma Ltd.'s best efforts to maintain safe
performance ratios, investors will eventually leave because of their excessively low-
interest cover ratio and the high average turnover period ratio, which will negatively
affect Uma's ability to generate a profit. As a result, Uma Ltd. is not in a great position in
the food business since investors are gradually pulling out and they are having trouble
paying their vendors. Because of the effects of COVID-19, this situation might only last a
short while, but if managers don't have a recovery plan, this will become a concern for
businesses.

SCENARIO 3

1.
 Description April May June
Cash receipts Account receivable 238000 252000 259000
Cash sale 108000 111000 105000
Total Cash receipts 346000 363000 364000
Cash payment For Purchases 210000 240000 260000
For Salaries 58000 60000 61000
For Utilities 7000 7000 7000
For Rent 60000
For Insurance
For Advertising 50000
For Equipment 30000 40000
Total Cash payment 415000 307000 368000
Net cashflows -69000 56000 -4000
Opening Balance -40000 -109000 -53000
Closing Balance -109000 -53000 -57000

2. The benefits and limitations of budgets and budgetary planning and control for
GAP

a) Benefits

Budgets have advantages for a functioning firm that should never be disregarded.
Budgeting first and foremost assists companies in staying on course and preventing
overspending (Bragg, 2018). Make sure money is also allocated to things that assist the
strategic objectives of the company (Bragg, 2018). Since GAP is a company that sells
commodities, it is crucial to plan ahead for the quantity of inventory they will need to
purchase and the profit they will realize from those purchases. A budget will assist firms
in understanding the resources they have available and in finding efficient methods to use
them. As a result, the company will develop a suitable implementation strategy to meet
the objectives. Management must choose which assets are simplest to invest in because
there is a finite quantity of money accessible to invest in fixed assets and working capital
due to bank establishing requirements. Businesses must forecast their revenue, thus it is
important to do so frequently to keep the company healthy.

Budgetary planning help managers understand the financial health of the company (The
Balance, n.d.). Management will be aware of whether or not the organization has
achieved its objectives. Without a budget plan, a company won't know what its
anticipated earnings or expenses for a specific time period would be. A company of this
nature will probably fail during the first two years of operation. Budgetary planning also
assists companies in creating strategies and luring large numbers of investors (The
Balance, n.d.). Planning a budget will be necessary for a commodity firm like GAP,
which primarily deals with customers and suppliers, in order to decide whether to extend
the market and develop a variety of profit plans that support luring in new suppliers.

The business will be exposed to numerous threats if the budget is not controlled.
Controlling the budget will assist management in identifying areas for cost-cutting and
increased efficiency (Thakur, 2019). Additionally, it offers to understand for in-depth
analysis and any necessary corrective action (Thakur, 2019). GAP must always monitor
inventory as a business because having too much or too little stock might impact revenue.
Therefore, the management of GAP must carefully monitor the budget in order to
determine the success of the operation and identify any gaps that must be filled.

b) Limitations

Although budgeting is frequently employed in business, it has its limitations. The

company's revenue or expense structure may alter to the extent that the actual results are
erroneous if the business climate changes (O'Hoyt, 2014). Changes in interest rates,
currencies, exchange rates, and commodity prices are a few other factors that could lead
results to unexpected diverge from budget assumptions. GAP's business market is
volatile, so the budget results will also be affected. Therefore, in order to go over budget,
management must move fast; otherwise, managers would continue to spend in
accordance with their initial budget authorization, obstructing any chance of turning a
profit.

Additionally, because budgeting is numerical in nature, it tends to direct management's

attention toward analyzing the company's financial performance (O'Hoyt, 2014). Since
GAP is a merchandiser, it frequently interacts with customers. Customers really don't
care about how much money the company makes; they simply care that they will receive
good service and a high-quality product at a fair price when they purchase from the firm.
Budgets do not serve consumer needs because they are frequently centered on increasing
or sustaining profitability.

3. Corrective actions to problems revealed by budgetary planning and control

a) Problems

The budget spreadsheet for GAP reveals that there is a cash deficit issue for the company
when total cash outlays exceed total cash collections. It is inconsistent with reality for the
cash fund to be negative. Because spending cannot occur without money collection. The
tax authorities won't accept the negative cash fund, which will make the company's
financial results worse. The incorrect order of accounting (paying money first, collecting
money later) or the recording of revenue and spending in the books that does not
correspond to the actual amount may be the cause of the negative cash fund. Besides,
GAP is facing a bank overdraft. As a result, interest costs have a tendency to mount up
over time and have a significant effect on both a company's income and the accuracy of
its cash budget.

b) Corrective actions

To solve the cash shortage and resolve the overdraft issue, GAP should make adjustments
to some expenses, such as advertising costs, rental charges, and equipment prices. GAP
needs to adjust some costs, including those for advertising, rentals, and equipment, in
order to address the cash shortage and overcome the overdraft issue. This might be
accomplished by bargaining with a third party or altering the payment schedule. To start,
the business can bargain with the lessor to divide the sum due in equal installments
throughout the course of the quarter in order to lessen the load in April. The time for
paying for the equipment charges should therefore be altered to account for a deferred
payment of one month. Finally, in order to spread out the payment over several months,
the business should bargain with the advertising agency. By taking this measure, GAP
may be able to maintain a positive cash flow in April and May. However, cash flow in
June will still be in deficit but will be significantly improved compared to the old budget
table.

4. Impact of solutions on organizational decision making

Description April May June

Cash receipts Account receivable 238000 252000 259000
Cash sale 108000 111000 105000
Total Cash receipts 346000 363000 364000
Cash payment For Purchases 210000 240000 260000
For Salaries 58000 60000 61000
For Utilities 7000 7000 7000
For Rent 20000 20000 20000
For Insurance
For Advertising 10000 40000
For Equipment 30000
Total Cash payment 305000 357000 388000
Net cashflows 41000 6000 -24000
Opening Balance -40000 1000 7000
Closing Balance 1000 7000 -17000

The first option is to bargain with the landlord to divide the money owed from the start of
the quarter to the month in an equitable manner. As a result, the business will pay 20,000
per month for rent rather than 60,000 for three months in the first week of the second
quarter. This measure will assist GAP to alleviate its financial load in April. However,
since they would need to keep track of spending each month, landlords may find it
frustrating. Managers must negotiate successfully to develop supporting policies for both
sides in order to earn their trust. The next option is to shorten the equipment cost payment
delay by one month. Adjusting the one-month delay in equipment cost payment is the
second option. The two months of April and June are when GAP now pays for equipment
costs. Having one-month payment arrears implies that GAP will cover April's equipment
costs in May and June's equipment costs in July. This is an excellent approach because a
one-month delay will help GAP balance its cash flow each month as May has fewer
expenses than April. Finally, the upfront advertising expense from April should be
broken down to June. GAP will pay 20% upfront in April and the remaining 80% in June
rather than paying $50,000 in April. The corporation will benefit from this because it will
conserve cash flow for the May campaign. However, it is a drawback for advertisers
because they must pay upfront costs to set up the campaign. Through the above three
solutions, GAP will keep a positive cash flow in April and May. Due to the 80%
advertising spend, cash flow in June will still be negative. However, as indicated in the
chart above, this amount has greatly improved when compared to the previous budget
spreadsheet.

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