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Highland Malt Accounting Policy Choices in Financial Statements Case Study 1 / 2
Highland Malt: Accounting Policy Choices in Financial Statements - Case Study
Highland Malt Financial Analysis We have made the following assumptions for the Highland Malt case study that while payments are received as cash to Spencer, all monies owed to Highland Malt for sales are considered accounts receivable. We have also assumed that all sales and cost of goods sold are recorded on a first in first out basis. There was no rent factored into the expenses for 2018 as none was showed to be paid in that period. Finally, all transactions are denoted in US Dollars even though the company is based in Scotland. For our analysis of the company, we calculated the current and quick ratio at 1.00 and . 56 respectively. The debt to equity ratio is .06 as the financing is mostly achieved through shareholder equity. The debt to assets ratio is also .06.The inventory turnover ratio is 3.4 and return on assets and equity are both .06 when rounded to the nearest hundredth.Based on the ratios and the evaluation of the financial statements, Highland Malt is a minimally profitable company. The return on assets is low given the overall time to earn and maintain the barrels, but it is profitable nonetheless. In order to increase profitability, there should be amendments to the commission agreement with Spencer’s to allow for reclamation of the commission in the event of a return as that sale is no longer adding to the bottom line.Additionally, there is the low return on assets as the production costs and timeline for the barrels is so high. This seems to be a pet project of the company for the serious collector rather than a day to day normal operation. Selling as individual bottles would net an additional $500 per barrel or another $125,000 in terms of net profit based on volume of 250 barrels sold over the course of the two year period at the stated sale price of $65 per bottles. The debt to equity ratio of the business makes them appear to be an incredibly enticing investment, but this is a deceptive figure, given the volatility in pricing of barrels for aging and their availability which leads to overall higher production costs and lower profits. While the market continues to grow, the return on assets and equity are only .06 making this a very thin margin for investment returns.
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