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Custom Assessment for Accounting Decision Making essay paper sample

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Brief overview Rio Tinto

Rio Tinto is a mining company in Australia. It was established in 1873 and identifies sites and extracts the different kinds of minerals that are used to make items. The metals that are commonly mined are: iron ore, gold, energy products and other metals. Rio Tinto is one of the best performing mining company in the world and has established plants in all the continents. The main goal of this company is to increase profits in the activities that they do. The most common strategy used by this company is investing in mines that are perpetual and economical to extract minerals. This Company ensures that it practices ethics, safety and social responsibility because its activities involve the environment. There is need to handle the environment with care lest it will be destroyed.

The company's business operations are based on excelling economically, good governing and social responsibility of the environmental. Rio Tinto establishes mining sites, extracting the metals and processing them. They then distribute to consumers who use these products to satisfy their daily needs and upgrade their way of life. For the company to have returns in a period of time, it invests on large ores that will be economical. Rio Tinto has been established in almost all the continents but the leading continents are in Australia and North America.

Rio Tinto offers career opportunities to all individuals who would like to join the company in continuing to drive to success. The opportunities are of diverse nature, motivating and satisfactory. Employees are allowed to give opinions, views and suggestions. The management keenly looks at the welfare of the employees and makes sure this group of businesses to climb to greater heights of success and prosperity. Employees have also testified about the favorable working conditions of this company.

b. Comment on Financial position

For one to comment on the financial position of the company, gross earnings and net earnings got over the recent years must be considered. The gross earnings for the years 2007, 2008 and 2009 are 74443, 10303, 6298 million US$ respectively. This already shows that the company improves over the years because the lesser the figure the less the expenditure. To confirm this net earnings have also improved over the years. In 2007 the net earnings were 7312 million US$ it dropped to 3676 million US$ in 2008 and improved to 6298 million dollars in 2009.

c. Comparison between 2008 and 2009

There is an apparent change between these two years. This is because in 2008 the gross earnings were 10303million dollars and the net earnings were 3676 million dollars. In 2009 the gross earnings were 6298 million dollars and the net earnings were 4872 million dollars. There are several indicators that explain this phenomenon. One of them is change of pricing in items. This reduced earnings in 2009 compared to 2008. For example: copper prices reduced by 28 percent. Iron ore was also supplied to customers with prices that had declined by 33% compared to the previous year. There was a notable decline of the US dollar in 2009 unlike 2008 when the US dollar had gained value more than the Canadian and Australian dollar. Due to the decline of value of the US dollar, the gross earnings increased 2009.

Another indicator influencing the change is sales volume. In 2009 there were more sales after iron ore was expanded. On the other hand, gold and other minerals were affected negatively because of the economic crisis. Generally there was an increase in gross earnings in 2009 compared to 2008. Other indicators like cash expenses were les in 2009 hence increasing the gross income. Expenses in 2009 were subdued well than in 2008 hence saving 2.6$ billion. Specifically, the iron group were advantaged by relatively low expenses and got more sales in capacity. The low costs included those of the energy. They also contributed to improving the gross income figure. This also made the budget to reduce by 60% compared to the one in 2008. Tax and interests were also in favorable rates of 24.8% in 2009 unlike in 2008 which had 31.6%. The trend should continue since it indicates improvement of he financial position of the company.

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e. Comment on the ROA and ROE of this company

Return on Assets

For one to comment on return on assets, calculations must be done for the previous years so that a trend is established. The years used will be 2006, 2007 and 2008. To get the figure for return on assets, net earnings are divided to total assets.

For 2006:   28829/7438= 3.89

For 2007:     87497/7312= 12

For 2008:     16120/3676= 4.4

The trend in return on assets is negative because it is fluctuating. This might be due to the changing figures of the net earnings and total assets that were affected by the economic global crisis.

Return on equity

To calculate return on equity the following years will be used: 2006, 2007 and 2008

Return on Equity= Net Profit ÷ Shareholder Equity for Period

For 2006:     7438/18232= 0.4

For 2007:      7312/24772= 0.0029

For 2008        3676/20638= 0.017

The return on equity has also a negative trend because it is inconsistent. The rate of return is also so small which shows very little amount is returned to equity. This could be caused by the fluctuating figures of net profit and shareholders' equity.

f. Are these financial statements completely objective reports?

The financial statements are objective. This is supported by the main objective of the company. The fundamental goal is to maximize profits. Since 1999-2008 the company has made 1282-3676$ million. This shows that the financial statements are therefore objective. Another reason is that the company aims to attract as many investors as possible. Through the financial reports, it is evident that the company has so many stake holders. This is shown from the figures that show their funds. Over the years, the shareholders' funds have increased annually. Since 1999-2008 the figure has increased from 6,963$million to 20638$million. The rights increased between years 2008 and 2009. This meant that there would be shares for more investors to buy. The net proceeds also increased and this shows that the company is achieving its objectives.  

g. If you were a shareholder, would you have any concerns with the financial performance of this company.

There would be a concern about the consistency of the earnings. The earnings need to be stable for better prediction and budgeting fort the company. How it would be advisable to invest in this company because the figures for earnings per share are gaining value over the years meaning the performance of the company and the economy are doing well. Proper conclusions cannot be made by just calculating ROA and ROE. There is need to evaluate other factors in the financial statements to come up with better conclusion. However, the shares are also increasing as the years go by meaning that the dividends become more attractive.

h. If the company were to apply for a loan, do you think a potential lender would be concerned about lending money to this company

A lender would definitely consider lending money to this company basing judgments on the net earning of the company, liquidity ratio and other factors. It has also been observed that the company is making great efforts in reducing its liabilities and increasing its assets. It therefore means that a loan being a liability will be paid up quickly. Net proceeds that are yielded by the shares have increased over the years. This money is used to settle debts so a loan would be easily be paid back. This company has an ascending trend of the net earning and the dividends increase every year therefore it would be in a position to acquire a loan. Also it is easy for the company to get collateral therefore. A lender would loan the company money depending on the financial strength.

i. What areas of financial performance do you feel the company needs to monitor more closely

The main area that needs attention is the net earnings. They need to be controlled to attain a stable trend. The fluctuation being experienced is unhealthy because it limits the ability of planning and forecasting. Hence becomes difficult to budget for the future, which is an important function of managing the company. There are losses made due to discontinued operations. Such losses should be completely eliminated so that there is continued effort of reducing costs to get quality commodities.

j. Is the company in a sound position with regards to cash?

The company is indeed in a sound position according to the cash flow statement. The amount of money that is generated by the company is more than the one used in its activities. There are more sources that bring in cash than the expenditure of the company. For example the company collected $14.9billion in 2009 that was used to settle debts. This was an improvement from the previous year that had $12.6 billion.  

k. What does the Cash Flow Statement tell you about the company's approach to managing cash flows?

The company seems to handle the movement of cash in a good way. The cash received by the company comes from various activities like purchase of equipment, having joint ventures, selling some assets and inflow from other activities that the company had invested in. The cash outflows include payment of dividends, interests, tax and money used in other investments. If years 2008 and 2009 were compared, the year 2009 had more cash inflow therefore more money was invested and the dividends were paid higher than in 2008.

 

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l. Does this company hold any intangible assets? Has the percentage of intangible assets changed from 2008?

The company does have intangible assets. They include: electricity, customer orders, man power and water supply. Due to economic crisis that affected the exchange rate, there was a significant change in the years 2008 and 2009. In 2008 the amount used on both tangible and intangible assets was 5388 US$ million and 2009 was 8574 US$ million. The percentage difference is 59.3%. This continues to show a good performance of the company because in 2009 they were able to increase their assets.

M. Does this company hold any contingent liabilities? What are they?

Rio Tinto does have contingent liabilities. They include: bank and money owed to subsidiaries. The amount used in 2008 was US$ 35033 million and in 2009 the amount US$ 18706 million. This partly shows better performance of the company in 2009 because they reduced their liabilities.

In 2009, the available rights were 21 with 40 shares. Each share was sold at 1400 pence and the money got form those rights was US$14.8 billion. This money was then used to settle debts that the company had. In 2008 the rights were 15 with 35 shares. Each was sold at 1255 pence and yielded proceeds of US$12.6 billion. There was a bonus offered in the price of the market hence adjustments were made. It seems the stock market rates were favourable in 2009 because there were more shares for investors. The proceeds yielded were also more there the company is growing.

o. Would you consider investing in this company?

Investing in this company would definitely be a wise idea if the judgment would be based on the financial annual reports of the company. The company has a trend of increasing its earnings there it means that it has a strong financial position. The shares are also increasing as the years go by meaning that the dividends become more attractive. It has also been observed that the company is making great efforts in reducing its liabilities and increasing its assets. This would be an appropriate company to invest in.

a). Calculation of ratios for the year 2008 and 2009

1. Return in capital employed

ROCE = EBIT / (Total assets - Current liabilities)

           = 468 / (1910 - 398)  

           = 0.3198

ROCE = EBIT / (Total assets - Current liabilities)

           = 334 / (2166 - 476)

           = 0.1976

2. Operating profit margin

Operating profit margin = Operating income / Net sales

                                          = 468 / 2360

                                          = 0.19

Operating profit margin = Operating income / Net sales

                                       = 334 / 2400

                                       = 0.1391

3. Gross profit margin

Gross profit margin = (Revenue - COGS) / Revenue * 100

                                = (2360-1360) / 2360 * 100

                                = 1000 / 2360 * 100

                                = 42.37%

Gross profit margin = (Revenue - COGS) / Revenue * 100

                                = (2400-1500) / 2400 * 100

                                = 900 / 2400 * 100

                                = 37.5 %

4. Current ratio

Current ratio = Current assets / current liabilities

                     = 506 / 398

                    = 1.27

Current ratio = Current assets / current liabilities

                     = 792 / 476

                     = 1.66

5. Acid test ratio

Acid test ratio = (Current assets - Inventory) / Current liabilities

                       = (506 - 296) / 398

                       = 0.527

Acid test ratio = (Current assets - Inventory) / Current liabilities

                        = (792 - 472) / 476

                        = 320 / 476

                        = 0.6722

6. Settlement period for accounts receivable

Settlement period for accounts receivables

                        = Average inventory held / COGS * 365

                        = 296 / 1360 * 365

                        = 79.44

Settlement period for accounts receivables

                        = Average inventory held / COGS * 365

                        = 472 / 1500 * 365

                        = 114.85

15. Settlement period for accounts payable

Settlement period for accounts payable

                          = Total purchases / Accounts payable

                          = 1656 / 156

                          = 10.61

Settlement period for accounts payable

                        = Total purchases / Accounts payable

                        = 1972 / 184

                        = 10.71

Inventories turnover period

                       = Sales / Inventory

                       = 2360 / 296

                       = 7.97 times                   

Inventories turnover period

                       = Sales / Inventory

                       = 2400 / 472

                       = 5.08 times

Return on capital employed ratio depicts the amount of profit got by a company. This information is mainly important to investors because they would want to know how the company or business is performing. It could also be referred to return on shareholder's funds. In order to arrive at these figure earnings before interest and tax figure is divided to the difference between total assets and current liabilities. According to the figure gotten from this company's statements, it shows that the company is getting little amounts of profits at the end of the year. In 2008, the ratio was 0.3198 and 2009, the ratio was 0.1976. This shows a decline and it is a negative trend for the company.

Operating profit margin

Operating profit margin shows how much the company is gaining in terms of profits. It is the amount that is left after deducting the amount spent on goods and the money spent in operations. This ratio will also assist in making judgments on how the company is being administered. It never accounts for some expenditure like taxes. This makes it an appropriate tool for evaluating profits of a business. It is an important ratio that is commonly used by shareholders to tell the financial position of a business. The operating profit is related to ROCE because the higher the operating profit margin, the more the ROCE. This company has a small operating profit margin and no wonder the ROCE is also small. In 2008 it was 0.19 and in 2009 it got a ratio of 0.1391.

Gross profit margin

Gross profit margin is the amount of money that has not been deducted expenses. It is a good way of making comparison between companies in the same line of operation or competitors. To arrive at this figure: (Revenues - COGS) / Revenue * 100. The ratio of this company is fair but it has dropped within the two years. This shows that the company has registered a decrease in its profits.

It is arrived at after dividing currents assets by current liabilities. It is used to tell whether the business or company is capable of meeting short liabilities or short term expenses. The business is financial strength is seen to improve from 1.27 in 2008 to 1.66 in 2009. In-fact in 2009 it is said that the company is in a stable position since the rule of thumb is 1:2

Acid test ratio is also used to tell whether a business or company is capable of meeting its possible expenses or debts. The company's ratio is shows the company is in a good position since it meets the rule of thumb ratio. The ratio has improved within the two years analyzed. In 2008 it is 0.527 and in 2009 it is 0.6722.

Settlement period for accounts receivables

This is the time within which invoices must be paid by customers. It is important to pay attention to this timeframe because invoices that takes too long to be settled might cause inconveniences or turn out to be bad debts. There is an increase of this period between 2008 and 2009. This should be monitored closely.

Settlement period for accounts payable

This period is the one taken to settle any bills or debts that the business owes to creditors. In both years the business uses averagely 10 days which is commendable. This has been enabled by its ability to settle immediate debts. It is depicted by both current and acid test ratios.

Inventories turnover period

This ratio shows the number of stock is sold and restocked in a certain time. The business's stock turn over is good meaning it is making sales at a good rate. In 2008 the turnover is 5 times and improves in 2009 with 7 times.

Comment on the performance of Super Bolt Ltd

Super Bolt manufacturers have an acceptable financial position especially if one would want to be their regular supplier. The stock turnover is appropriate, both acid test ratio and current ratio also provide supportive and relevant information that would win a suppliers confidence. This statements show that stock moves fast hence frequent stock taking, period for accounts payable is short and the business is capable of meeting its short term's debts.

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