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BUS 5110- Managerial Accounting- Written Assignment Unit

7#3
managerial accounting (University of the People)

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BUS 5110: Managerial Accounting- Written Assignment Unit 7

Case Study: Fashion Forward and Dream Designs

Written Assignment Unit 7
Managerial Accounting
Term 4 2020
BUS 5110
University of the People
May 2020

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BUS 5110: Managerial Accounting- Written Assignment Unit 7

Written Assignment

Submit a paper which is 2-3 pages in length (no more than 4-pages), exclusive of the

reference page. Paper should be double spaced in Times New Roman (or its equivalent) font

which is no greater than 12 points in size. The paper should cite at least three sources in APA

format. One source can be your textbook.

Please describe the circumstances of the following case study and recommend which

company to purchase. Explain your approach to the problem, perform relevant calculations

and analyses, and justify your recommendation. Ensure your work and conclusions are

thoroughly supported.

Case Study:

You work in the mergers and acquisitions department of a large conglomerate who is looking

to invest in a retail business. Two companies, Fashion Forward and Dream Designs, are the

final two options being considered. You have the most recent available income statements

and two years of balance sheets for each company.

Compute the following ratios for each company:

 Profit Margin Ratio

 Return on Assets

 Current Ratio

 Quick Ratio

 AR Turnover Ratio

 Average Collection Period

 Inventory Turnover Ratio

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BUS 5110: Managerial Accounting- Written Assignment Unit 7

 Average Sales Period

 Debt to Equity Ratio

For this assignment:

 Compute all required amounts and explain how the computations were performed

 Evaluate the results for each company and explain what each ratio means

 Compare and contrast the companies.

 Based contrast on your analysis:

o recommend which company the organization should pursue

o Thoroughly support your conclusion, including what other factors should be

considered

o Be specific.

Superior papers will:

 Perform all calculations correctly.

 Articulate how the calculations were performed.

 Evaluate the ratios computed and explain the meaning of the ratios.

 Compare the companies.

 Recommend which company to pursue, supported by well-thought-out rationale and

considering any other factors that could impact the recommendation.

Be sure to use APA formatting in your paper. Purdue University’s Online Writing LAB

(OWL) is a free website that provides excellent information and resources for understanding

and using the APA format and style. The OWL website can be accessed here:

http://owl.english.purdue.edu/owl/resource/560/01/

This paper will be assessed using the BUS 5110 Unit 7 Written Assignment rubric.

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BUS 5110: Managerial Accounting- Written Assignment Unit 7

Solutions

Compute the following ratios for each company:

Fashion Dream
Forward Designs

• Profit Margin Ratio

= Net Income 136,500 212,500
Net Sales 2,500,000 5,400,000
= .0546 = .0497

The profit margin generated is higher with Fashion Forward indicating a more profitable

model.

• Return on Assets
= Net Income 136,500 212,500
Avg Total Assets (2,747,000+2,805,000)/2 (4,381,250+4,450,000)/
2
=.0492 = .0481

The net income generated from each dollar is slightly greater for Fashion Forward.

• Current Ratio
= Current Assets 1,297,000 2,280,500
Current Liabilities 1,170,000 1,625,750
=1.11 =1.40

Dream Designs has a greater current ratio to cover liabilities and strengthening its financial

position. (A Refresher on Current Ratio, 2015)

• Quick Ratio
=Current Assets - Inventory 1,297,000-112,000 2,280,500 -200,000
Current Liabilities 1,170,000 1,625,750
= 1.01 = 1.28

Dream Designs has a greater ratio of quick assets to cover liabilities if necessary.

• AR Turnover Ratio
= Net Credit Sales 2,000,000 4,320,000
Avg Account Receivables 200,000 250,000
=10 =17.3

Dream Designs has a better ratio for collecting receivables.

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BUS 5110: Managerial Accounting- Written Assignment Unit 7

• Average Collection Period

= 365 Days 365 365
AR Turnover Ratio 10 17.3
= 36.5 = 21.1

Dream Designs has a better ratio for collecting fund on credit sales, allowing it hold less debt.

• Inventory Turnover Ratio

= Cost of Goods Sold 1,400,000 3,250 000
Inventory 112,000 200,000
= 12.5 = 16.25

The inventory turnover ratio favours Dream Designs, indicating a greater turnover rate.

• Average Sales Period

= 365 Days 365 365
Inventory Turnover 12.5 16.25
= 29.2 =16.25
This ratio favours Dream Designs with a shorter turnaround time to sell inventory.

• Debt to Equity Ratio

= Total Liabilities 1,345,000 1,901,250
Total Equity 1,402,000 2,480,000
= .959 = .767
The debt to equity ratio favours Fashion Forward as their ratio is closer to one and indicates a

more solid position.

Fashion Forward has the greater position for the following ratios: Profit Margin Ratio,

Return on Assets Ratio and Debt to Equity Ratio. Dream Designs has the stronger position

on Current Ration, Quick Ratio, AR Turnover Ratio, Average Collection Period, Inventory

Turnover Ratio and Average Sales Period. With these comparisons and taking into the

account further financial numbers from the income statements for the last two years for both

companies, I would choose Dream Designs as the organization to pursue. Dream Designs

revenues and net income along with their stronger stance regarding inventory turnover, assets

and liabilities makes them the better choice. Some areas of improvement should the merger

materialize would be to reduce their SGA and improve their Debt to Equity ratio.

REFERENCES

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BUS 5110: Managerial Accounting- Written Assignment Unit 7

A Refresher on Current Ratio, (2015, September 14). Harvard Business Review. Retrieved

from https://hbr.org/2015/09/a-refresher-on-current-ratio

Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. Retrieved

from https://2012books.lardbucket.org/books/accounting-for-managers/index.html

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