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

Financial and Management Accounting - Case Study showcaseThe rise in inventory levels is of particular significance and it is suggested that if a proper stock management be after was put in place, the Company would be able to improve its liquidity and cash flow position. It is similarly 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 have a favourable impact on encourage Ltd., in terms of liquidity and otherwise.Foster Ltd. has gone through rapid expansion over the two age 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 tax has grown by 43.75% and the investment in machinery has increase by 60% in 2006. The Company has excessively increased its long term funding by drawing a 1 Million loan as well as making a share issue.This expansion has reaped benefits in term s of positiveness tho the liquidity and cash flow position of the Company has deteriorated. The directors themselves have felt the strain and the Cash merge Statement prepared for 2006 clearly reflects the problem. The financial statements show further signs of the cash shortage and these will 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 receipts quite rapidly without securing the additional funds 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 workable remedies suggested. In addition, other ways in which the liquidity position of the Company can be alter will also be considered.Foster Ltd.s Current meshability &Liquidity/Cash flow set As mentioned above, the profitability of Foster Ltd. has seen a commen dable 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 represent of sales would have increased along with the revenue. However, in Foster Ltd.s case, the make up of sales has increase in a proportion quite considerably less 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 fixed costs over a big number of units thereby reducing the fixed cost per unit.Along with its G P Ratio, the Total Profit proportion has also increased from 8.75% to 8.99% (see Appendix). This may not be a sizable increase but is emphatically 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 tax costs to a lesser