Report Writing 2 (KampongBoy).docx

Report Writing 2 (KampongBoy).docx - Date 15 February 2014...

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Date: 15 February 2014 To: Owner of KampongBoy Purpose: To provide advice to the owner of KampongBoy on the appropriateness of opening the new store and the proposed funding option. Introduction KampongBoy is a business that operates a chain of mini markets mostly in suburban residential area which was established 20 years ago in Malaysia. The accountant of KampongBoy has prepared a report with the reference of the balance sheet and income statement for the owner to make an inform decision on whether to open a new store for the expansion of the business and proposed financing method. For that reason, the owner would decide to either apply a five years’ loan of $500,000 to finance the new store or not. The report has been prepared after viewing the financial statement for the year ended 31 December 2008 and 2009. Furthermore, the ratios have been derived from the financial statements in analyzing the profitability, liquidity and solvency of KampongBoy for 2013 shown in page 6. Further information such as debt servicing will be discussed advanced in this report. Profitability Profitability measures the effectiveness of the overall efficiency and earning performance of the business. Gross profit margin measures the margin of profit available to cover operating expenses. It has been improved by 0.8% from 39.2% in 2012 to 40% in 2013 and it is above the industry average of 35.1%. This means that for every $1, KampongBoy will earn 40 cents in gross profit. Net profit margin measures the net profit generated from each dollar of sales. Over the year, KampongBoy has huge improvements as the net profit margin skyrocketed from -1.6% in 2012 to 1.8% in 2013 which increased by 3.4%. However, both figures are below than the industry average of 2.0%. This illustrates that for every $1 in net sales, KampongBoy is making 1.8 cents in net profit. The gross profit margin increases due to the reduction in sales of 2.9% is smaller than the reduction in cost of goods sold of 4.3%. The cost of goods sold dropped as the number of unit sold decreases as there are more competitors which will cause more availability of substitute in hypermarket industry. Thus, the demand for KampongBoy’s goods become more elastic, perhaps this is the reason for the shrinkages in sales. Moreover, the cost of goods sold falls as centralize purchasing division allows the business to buy in bulk to obtain more trade discount and reduces the cost per unit. Lastly, the drop in
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