Pasrty co.
(All figures in $'000).
Excess depreciation: 30000/30= 1000.(charged to operating expenses).
Research costs to be charged in cost of sales:2500, less from operating
expnses: 2500.
Ratios
Gross profit margin
Adjustments
(7950-2500) 5450
(5450Operating profit margin 4725+2500+1000)
4225
(33600-30000+1000)
Roce
4600
Workings
5450/16300*100
Adjusted ratios
33.4%
4225/16300*100
25.9%
4225/(4600+5200)*100 43.1%
Performance:
> First of all if we look at the gp margin of dough co which is 33.4% after
applying the cook co's policies , it is reduced from 48.8% because all the
amortisation expenditures of research and development, which were
previously charged to operating expenses are now charged to cost of sales.
now if we compare both of the company's ratio with same accouting policies
we see that dough is still making a slight more gross profit than the cook co',
even though it is said that the cook co operates from a low cost productioin
facilities, on the other hand if we see that dough is a whole saler and it sells
directly to the chains of coffe shops but the costs of sales of dough might be
low due to the reason that dough co has adopeted the revaluationin model
and had been charging the depreciation expense to operating profit.
>Then the operating profit of dough is still greater (25.9%) than cook's op
using the same accounting policy which indicates that dough co is performing
better than cook. Previously the op of dough was 19.8% which was lower than
cook's that was due to the reason that previuosly dough was charging all it's
depreciation and ammortization expense to operating expenses but now
according to cook's accounting policy dough charges all these expenses to
cost of sales which has increased dough's op. In short if we compare both of
the companies ratios under the same accounting policy, dough is still
performing better than cook.
The one thing that can be noted is the high salaries taken by dough's
management compared to cook's salaries which could be to show higher
profits in cook.
>The ROCE which is the primary measure of profitibilty the roce of Dough co
increased surpassingly to 43.1% from 8.3% after applying the same policy as
cook's. the 2 facts if we look at, one is the pbit which we discuss prevouisly
the slight increase in it , the other and the main reason which we should
consider that without the revaluation the equity compenent went down and it
impaccts inversly on the roce, as previously the dough was using revaluation
model and he revalued his property by $30m which vaused a massive
increase in the equity and a massive decrease in roce if dough uses the cost
model he will have a good roce but on the other hand if we note that dough
has a high valued proeperty and using cost model will understate it's
property.and the other reason behinf the low equity of dough could be that ot's
having very low retained earnings in comparision with cook co.
Difficulties:
Withoiut knowing the correct value of cook's asset it is much difficult to asses
weather which company will be more costly to purchase.
and the other reason of difficulty could be that on the basis of a single year
financial statements it is difficult to judge wether cook's director are taking low
salaries in order to overstate the profit or the dough's directors are taking high
salaries by own made policies in the company.
Conclusion:
Overall we can say that the both companies are profitable but having the
different