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Accounting in Thai-Lay Fashion Company

Introduction

Managing finances is one of the crucial tasks in any organization whether it is a private concern or a government one. It is essential that the management has up to date information on its finances. For this purpose, a set of records are kept by the company so that at anytime the management can have up to date information about its current financial position. “Accounting is the recording of all transactions of a business, making informed decisions based upon this information and the subsequent production of reports for the managers of the institution on the various functions of the business.” (Definition of Accounting).

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The process of physically recording the financial transaction is known as book-keeping. These records are also essential in the preparation of the final financial statements and annual statements like the profit and loss account, balance sheet and cash flows so that they may be made available for inspection to its management and all the stakeholders of the company. Such statements are also required by statute especially for a legal entity like a company with limited liability.

Accounts in Thai-Lay Fashion: The Thai-Lay Fashion Company is a garment manufacturer and exporter of quality garments based in Hong Kong. The company, like any other well established and well-run organization, keeps its own set of financial records. This professionally run company is headed by its managing director who is appointed by the board of directors. There is a wide range of stakeholders like the people who own stock in the company, its customers and suppliers, the government and other people interested in the welfare of the company. The reasons for preparation of the above can be stated as:

  1. Assist management in understanding the financial position of the company and to enable them to budget and make sales forecast for the future.
  2. Providing financial information to the stakeholders of the company: There are many stakeholders in Thai-Lay Fashion Company. Shareholders in the company will need to know if their investment in the organization is giving them adequate returns. Banks and other financial institutions need to know whether providing financial assistance to the company is a viable proposition. The suppliers need to know if the company can be extended credit safely. Finally, the government needs to know if the company is paying its statutory duties correctly and on time.

The following accounting records are maintained by the company. Thai-Lay Fashion used a custom-made accounting package for maintaining its accounts. The package can handle the following books.

  1. Journal
  2. Purchase and Sales ledgers
  3. Creditors and debtors ledger
  4. General ledger
  5. Cash and bank statements
  6. Bank reconciliation statements
  7. Final accounting statements like trial balance, profit and loss account and balance sheet.

The first entry of any transaction can only be made through the journal and the accounting system will handle the rest of the records. (Finance and Accounts: Introduction to Financial Accounting). In addition to the above, the company maintains a full range of cost accounting records for controlling its manufacturing operations.

Analysis of the financial accounting in Thai-Lay fashion Co. Ltd.

It has been mentioned in the previous section about the importance of keeping financial records and the preparation of the annual and periodic financial statements. It is equally important to see that these records and statements are analysed so that the actual financial position and the future way of the firm be understood. It will also help in finding out the working capital requirements of the firm. All these can be done with the help of a cash flow statement and through the interpretation of financial ratios. A cash flow statement will help management to estimate to a large extent the volume of cash the firm will have at a particular point of time in the future.

This will be a great help in fixing the working capital requirements of the firm. The Thai-Lay Company regularly prepares cash flow statements taking into account inflows and outflows from its operating, investing and financial activities. (Managing your Cash Flow: Major Classification of Cash Flow).

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Cash flows can be prepared using direct and indirect methods and the company prepares its statement primarily using the direct method. Moreover, the following financial ratios are also analysed by the company. This is mainly to find the financial health of the company apart from other reasons.

Finding profitability

The return on shareholder funds (ROSF) is a ratio to see that the company’s investors are adequately rewarded if the firm is operating profitably.

ROSF = Net profit – taxation/Share capital + reserves X 100

The ROSF of Thai-Lay Company is 29% for the year which is quite healthy for a garment company. Since there are no preference shareholders in the company dividends on the same is not deducted from net profit. Similarly, share capital has an only ordinary share capital. Another ratio employed by Thai-Lay is the Net Profit Margin Ratio to understand how healthy the profit margin of the firm actually is. (Net Profit Margin. 1997-2008).

Net Profit Margin = Net Profit (Before interest and taxes)/Total sales X 100

The net profit margin for the company is 5.2% which indicates that expenditure and wastage are factors that have to be reduced to a great extent. A gross profit margin ratio is also calculated in the same way above by replacing the net profit with the gross profit of the company. Return on Capital Employed (ROCE) is another ratio usually employed by companies though this is not used in Thai-Lay. The gross profit margin is quite healthy at 12% which indicates that manufacturing operations and costs are efficient and under control.

Resource efficiency

It is essential to see that the resources of Thai-Lay are efficiently managed and there are a few ratios that can be used to understand this. The company holds the inventory of raw materials such as yarn and dyes and finished goods like garments. The Average Inventory Turnover period is calculated to see that such inventory is not held in stock for unusually long periods of time.

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Average Inventory Turnover Period = Value of inventory in stock/Cost of Sales X 365

Inventory turnover is 90 days for Thai-Lay company. The company sells most of its products on credit and hence an average settlement period for receivables is calculated to see that bills are settled without undue delay.

Average settlement period for receivables = Receivables from debtors/Revenue from credit sales X 365

Thai-Lay has a 45 day period for settlement of receivables. Similarly, the company is careful not to delay its payments to its creditors. A payables ratio is calculated the same way by replacing receivables with payables and revenue by credit purchases. The company maintains the same ratio as that of receivables in order to balance a healthy cash flow. Since Thai-Lay employs a large number of employees, it calculates the sales revenue per employee ratio. It is a simple ratio that divides total revenue by the total number of employees. The current ratio for the company is HK$ 40,000 for the current year. Another ratio which is the sales revenue to capital employed has not been calculated.

Liquidity of Thai-Lay company

Two ratios namely, the current ratio and the acid test ratio is employed here. The former is arrived at by dividing the current assets by current liabilities. Being a manufacturing concern, the current ratio for the company is 2.1 which is quite healthy in this field. The acid test is a more accurate test at arriving at the liquidity of the company. Since inventory turnover is 90 days here, it cannot be taken as a current asset and hence excluded from the value. In such a case Thai-Lay has an acid test ratio of 1.9 when its inventory is not included in the calculation.

Financial gearing

This ratio has not been taken since the company relies very little on interest-bearing loans and is dependent more on reserves and shareholder capital. The company also receives credit without interest from all its suppliers. So gearing ratios and interest cover ratios are not calculated here.

Investment ratios

There are four ratios namely dividend payout ratio, dividend yield ratio, earnings per share, price/earnings ratio. The dividend payout ratio is got in the following manner

Dividend payout ratio = Dividend for the year/ Funds available for paying dividends X 100

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There are no preference shareholders in the company. The company had a ratio of 30% this year. The dividend yield ratio on the other hand is the ratio between earnings per share and the market value of shares. Since the company is not publicly traded, this ratio was not taken into account. Earnings per share are calculated as follows

Earnings per share = Earnings available/Total number of shares X 100

This was 1.25 HK$ for the year for the company. The price earning per share was not calculated since, as mentioned before, the share is not being traded in the market.

Management Accounting

Many aspects of accounting, cash flow and ratio analysis have been discussed above in this paper. It is up to the management to make use of these and other techniques for the survival and growth of an organization and this process could be called management accounting. “Management accounting is the analysis and presentation of financial and dallied operating data which helps management to carry out its planning, control, and administration duties effectively.” (Management Accounting: Description of Management Accounting, Explanation. 2008).

In other words, this is a combination of management and accounting where the management uses the accounts at its disposal to study the financial health of the company and based on it, make effective decisions that will sustain and bring growth to the company in the future. In this chapter, an Indian company called Bata India Ltd. is taken up for analysis. This is a professionally run company that is listed on the Bombay Stock Exchange. The primary business of the company is the manufacture of footwear for casual, business and sports purposes.

The company is run by the CEO and assisted by its board of directors. The company, as a part of management accounting regularly prepares budgets and uses them to compare them with actual results. Any variances are scrutinized and efforts to control or minimize them are taken immediately. Since this is a manufacturing company like Thai –Lay Fashion, the company uses many costing functions like break-even analysis for taking management decisions. Companies like Bata India Ltd would also use the margin of safety to analyze its efficiency in the production process. Another costing technique used is operating gearing. This is the ratio of contribution costs and the variable costs in a company.

Contribution cost refers to a value that is arrived at by deducting the variable cost of the product from its selling price. The company also uses profit-volume charts in decision making. The company’s break-even point was 8,268.8 million (8,674.8 revenues less 406 net profit) in Indian rupees. The company also makes effective use of job and batch costing techniques in its costing process. They calculate the estimated costs and add the profit margin to it (to match the estimated profits) in order to arrive at a competitive selling price.

These are some of the effective practices followed by Bata India Ltd which is reflected in the performance of the company. The company had total revenues of 6939.1 million in 2004, 7038.8 in 2005, 7702.1 in 2006 and 8674.8 in 2007. Net income also rose correspondingly from 273.8 million in 2006 to 406 million in 2007. Hence, management accounting practices in an organization is crucial to its success in the long as well as short run.

Financial management in Thai-Lay Fashion Ltd

Financial management is one of the most important tasks of the management of an organization. This is the process by which the management makes sure that it has the adequate resources to run an organization and also to see that these resources are utilized in a proper and profitable manner. “In short, Financial Management deals with Procurement of funds and their effective utilization in the business.” (Financial Management: Meaning of Financial Management. 2006).

There are three main objectives to financial management namely financial planning, financial control and decision making. Financial planning refers to the process of seeing that adequate funds and resources are made available for an organization’s long term, medium term and short term goals. There would be requirements for meeting additional investments in land or machinery which is an example of a long term goal. Paying salary, rent, purchase of raw materials etc are examples of short term goals. Financial control involves steps to see that the funds resources made available are utilized properly. The management also has to ensure that such resources are spent according to plans and stays within budgets. Managerial decision making is also a very important function since certain decisions will have far reaching implications.

For example, the decision to develop a new product line will be costly in terms of research and development and the lead time required between the decision and the actual launch. If the product fails in the market, the company will face huge losses and hence the decision taken was a wrong one. This is where the tools and techniques mentioned earlier will help the management to make right decisions most of the time. Thai-Lay Fashion has an independent finance department headed by a qualified manager with a background in management. The main strategies of management decision making in Thai-Lay Fashion is focused on three areas namely capital investment decisions, financing, capital budgeting and capital rationing.

For making capital investment decisions the company uses the following methods namely Accounting Rate of Return (ARR), Payback Period (PP), Net Present Value (NPV) and Internal Rate of Return (IRR). (On Capital Investment Decision-Making Methodologies: Tradition Methods-Capital Budgeting). Capital budgeting is also effectively carried out and the management has been able to see that all departments have access to the necessary funds allocated to them during budgeting and planning stages.

Financing is mainly through shareholder funds and company reserves though the company may approach a bank for financing its expansion plans in the future. Thai-Lay has not yet resorted to capital rationing because its operations have been running more or less according to plans. The management has also decided that Thai-Lay Fashion Company will resort to the leasing of property rather than buying in case the company is in need of a landed property. This is because the management has studied the pros and cons of both buying and leasing. They have come to a decision that leasing is a better option especially for a small and medium enterprise (SME) like Thai-Lay Fashion Company.

Operations management in Thai-Lay Fashion Company Ltd

Any organization whether it is privately owned or a government one has to have a series of operations for effective functioning. It is also essential that each of these operations have to be effectively managed. “Operations management focuses on carefully managing the processes to produce and distribute products and services.” (McNamara, 1997-2008). For example, Thai-Lay fashion has purchasing, marketing, manufacturing, demonstration, planning etc as its operations. Each of these may have to be subdivided into smaller operations for effective functioning. The term operations management will be used only by the larger organizations.

Smaller ones like Thai-Lay fashion will refer to it as departmental functions rather than operations management. But in any case, such operations have to be managed and so it can be said that operations management exists in each and every running organization regardless of its size. Thai-Lay Fashion has an effective operations management system through its departmental managers. The company has a purchasing department which is monitored by the quality control department.

The same process is followed with the manufacturing department also. The market of the company is situated in different countries in Europe. The company does not sell directly to the individual, but only to textile shops in these markets marketing is done through advertisements in trade journals. Another feature of the manufacturing department is that they have adopted the policies of successful manufacturers in Taiwan.

A study conducted in that country has revealed that companies in Taiwan have certain characteristics that make them successful. “Four factors have been highlighted as major competitive priorities:

  1. quality;
  2. cost;
  3. delivery, including dependability and speed of delivery; and
  4. flexibility, in terms of volume, product mix, changeover, modification, rerouting, material, and sequencing.” (Chen, 1999).

Conclusion: A comprehensive study of Thai-Lay Fashion Company Ltd. has been done here with reference to the accounting and management practices of the organization. It has been found that the company is proving itself to be quite successful in the field of textile manufacturing and exporting. The company follows strict accounting practices as required by law. Moreover, many management decision-making techniques have been adopted by the company so that it may remain competitive. Certain areas like cutting down on wastage and administrative expenditure is advised. But on the whole, the company has responded well to its challenges by successfully incorporating accepted management practices.

Bibliography

Definition of Accounting. VETNET. Web.

Finance and Accounts: Introduction to Financial Accounting. Tutor2u. Web.

Managing your Cash Flow: Major Classification of Cash Flow. Web.

Net Profit Margin. (1997-2008). InvestorWords. Web.

Management Accounting: Description of Management Accounting, Explanation. (2008). 12MANAGE. Web.

Financial Management: Meaning of Financial Management. (2006). Financial Management. Web.

On Capital Investment Decision-Making Methodologies: Tradition Methods-Capital Budgeting. Web.

McNAMARA, Carter. (1997-2008). Operations Management. Free Management Library. Web.

CHEN, Wen-Hsien. (1999). Manufacturing Strategies of Network-Based Small Firms: Observations on the Textile Industry in Taiwan. Journal Article Excerpt. Questia. Vol. 37. Web.

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