Basic Accounting

This subject was not a particular subject of mine. However, I had to push myself because this subject is mandatory for my course in degree! :D. Nevertheless, one must prevail. So, my favourite topic in this subject is "Accounting Concept". I like it not because its the easiest, but because it is the base of the reason accounting is taught. This topic teaches the principles of accounting and gives people a reason to do and learn proper accounting. The topic I like the least is "Budgeting". Budgeting is a process of planning the financial future of a business. This topic teaches us to set the predicted income for a business realistically. This topic is my least favourite because it is only a prediction. Nothing is certain. It is subjected to many obstacles. The topic I think that will be useful for my future is " Profit & Loss Statement & Double Entry Recording". This  topic is about the reporting the profit and loss of a business. This will be useful as it will help me to monitor the profit and the loss of a company. It will be used to determine whether a business is profitable or on the verge of bankruptcy. One assignment i this subject is based on the topic "Financial Ratios and Interpretation".  This was an interesting assignment as we are asked to choose a public company and analyse the state of their business. This has given me the opportunity to get a tiny feel on how working as an accountant in a huge would feel like.

FOUNDATION IN NATURAL AND BUILT ENVIRONMENTS

BASIC ACCOUNTING

SEMESTER 2

JULY 2012 INTAKE

 AUDI AG

AZMIRA YAAKOB (0312011)

QUINNIE TAN (0311888)

TABLE OF CONTENT

NO.	CONTENTS	PAGE(S)
1	Company Background	3-5
2	Ratio Calculations (Profitability Ratio)	6-7
3	Ratio Calculations (Financial Stability Ratio)	8-9
4	Interpretation of Calculations (Profitability Ratio)	10
5	Interpretation of Calculations (Financian Stability Ratio)	11-12
6	Investment Recommendation	13
7	Appendix	14-16
8	Reference	17

COMPANY BACKGROUND

Audi AG is a company formed by a merger between 4 different companies; Audi, DKW, Horch and Wanderer.

In 1899, August Horch founded a car manufacturing company which he named “Horch” in Cologne, Germany. However in 1904, August Horch withdrew from his own company Horchwerke , and started a new company which he named “Audi”.  August Horch named the company Audi by translating his last name into Latin. Audiwerke started operating in 1910 in Zwickau.

Meanwhile, the third company, DKW was originally known by the name Rasmussen & Ernst in 1904 in Chemnitz. Initially, DKW manufactures and sold heavy operating machines such as exhaust-steam oil separators and vulcanization equipment. However in 1919, the company was renamed as Zschopauer Motorenworke and switched to manufacturing 2-stroke-engines which lead to the production of motorcycles sold under the brand DKW. Ultimately, they stated manufacturing and selling small motor cars which appeared in the market in 1928

As for Wanderer, it was founded by 2 mechanics Johann Baptist Winklhofer and Richard Adolf Jaenicke who started a bicycle repair shop in 1885. As the business grew, they began manufacturing their own bicycles. However, due to the high demand, the company began its trade as Wanderer Fahrradwerke AG. They produced their first motorcycle in 1902 and began entering the automobile production market in 1913 by producing a small 2-seater car named Puppchen.

In June 29,1932, Audiwerke, Horchewerke, Zschopauer Motorenworke and DKW merged to form Auto Union AG. The headquarters for Auto Union Ag was in Chemnitz.

Due to the merger, Auto Union AG became the second largest automobile manufacturer in Germany. These four companies explain the intertwined rings logo which defines the identity of the present Audi. These intertwined symbolises the inseparability and the unity of the four-founder-company. After the merger, each of the company was assigned with different automobiles to manufacture. DKW was responsible to manufacture motorcycles and small cars. Wanderer was responsible to build middle sized cars, while Audi was assigned to manufacture deluxe middle sized cars and Horch was assigned to produce the top-of the-range deluxe automobiles.

After the second world war, Auto Union AG was forced to move to Bavaria. In 1949,Ingolstadt, Bavaria, a new company was founded. It was named Auto Union GmbH, Ingolstadt to uphold the company’s four ring emblem.

In 1969 Auto Union GmbH of Ingolstadt merged with NSU Motorenwerke AG from Neckarsulm. Originally NSU manufactured knitting machines for twenty years and finally diversified into manufacturing bicycles in 1886. In 1901, NSU started producing motorcycles and subsequently started producing cars in 1906. After an on-an-off production of cars, NSU finally commence producing cars in 1958 permanently. In March 1969, Auto Union GmbH Ingolstadt merged with NSU Motorenwerke AG, leading to a new company name, Audi NSU Auto Union AG. Thw company’s headquarters also moved to Neckarsulm.

In March 1977 the company was renamed again. This time, it was simply named as AUDI  AG. Once again, the company’s headquarters was relocated to Ingolstadt, Bavaria. .  In 1998, Audi achieved unit sales of almost 600,000 cars. Making a total sales revenue of  € 27 billion. The company has around 42,000 employees in total.

Now, more than 90 percent of AUDI AG’s share is owned by Wolkswagen Group. Currently, Audi is a leading international producer of high quality cars. The company has manufacturing sites in Germany and various other countries, which includes Hungary, China and South Africa.  In 1998, Audi achieved unit sales of almost 600,000 cars. Making a total sales revenue of  € 27 billion. The company has around 42,000 employees in total.

 RATIO CALCULATIONS

Profitability Ratio

Return On Equity Ratio =              Net Profit                x    100%

                                           Average Owner’s Equity

Average Owner’s Equity =

                                   

                                    = 13968

2011	2012
Return On Equity Ratio = = 43.2 %	Return On Equity Ratio = = 42.6  %

Net Profit Margin Ratio =              Net Profit                x    100%

                                                        Net sales 

2011	2012
Net Profit Margin Ratio = = 13.6 %	Net Profit Margin Ratio = = 12.3 %

Gross Profit Margin Ratio =           Gross Profit                x    100%

                                                           Net sales 

2011	2012
Gross Profit Margin Ratio = = 18.3 %	Gross Profit Margin Ratio =  = 20.1 %

  

Selling Expense Ratio =           Total Selling Expense            x    100%

                                                          Net sales 

2011	2012
Selling Expense Ratio = = -8.2 %	Selling Expense Ratio = = -9.5 %

General Expense Ratio =       Total General Expense            x    100%

                                                          Net sales 

2011	2012
General Expense Ration = = - 0.98 %	General Expense Ration = = - 1.09 %

Financial Expense Ratio =      Total Financial Expense            x    100%

                                                          Net sales 

2011	2012
Financial Expense Ratio =  = -0.6 %	Financial Expense Ratio = = -0.9%

Financial Stability Ratios

Working Capital Ratio =         Total Current Asset          

                                                 Total Current Liability       

2011	2012
Working Capital Ratio = = 1.59:1	Working Capital Ratio = = 1.44:1

Total Debt Ratio =       Total Liability      x    100%

                                        Total Asset 

2011	2012
Total Debt Ratio = =65.2%	Total Debt Ratio = =62.9%

Inventory Turnover Ratio =  365             Cost Of Goods Sold

                                                                        Average Inventory 

Average Inventory: = 

                           

            = 4354

2011	2012
Inventory Turnover Ratio = 365   = 44.1 days	Inventory Turnover Ratio = 365   = 40.8 days

Debtor Turnover Ratio =  365          Credit Sales 

                                                             Average Debtors 

Average Debtor:     =  

= 7660

2011	2012
Debtor Turnover Ratio = 365 = 63.5 days	Debtor Turnover Ratio = 365 = 57.3 days

Interest Coverage Ratio  =   Interest Expense   +       Net Profit

                                                            Interest Expense

                                     

 

2011	2012
Interest Coverage Ratio = = 23. 9 times	Interest Coverage Ratio = = 15. 5 times

Price or Earning Ratio

Price or Earning Ratio =

                                    =

                        = 6.29  6.30

RATIO INTERPETATION

Profitability Ratio Interpretation

Return to Equity

·         During the 2011-2012 periods, the Return On Equity decreased from 43.2 % in 2011 to 42.6 % in 2012. This means that the owner is getting less return in his capital.

Net Profit Margin

·        During the 2011-2012 periods, the Net Profit Margin has decreased from 13.6% to 12.3%.This means that the owner is getting less profit

Gross Profit Margin

·        During the year 2011-2012 periods, the Gross Profit Margin has increased from 18.3% to 20.1%.This means the ability of the business to control Cost Of Goods Sold is getting better.

Selling Expenses Ratio

·        During the 2011-2012 periods, the Selling Expenses has decreased from -8.2% to -9.5%.This means the ability of the business to control SER is getting good.

General Expenses Ratio

·        During the 2011-2012 periods, the General Expenses Ratio decreased from   -0.98% to -1.09%.This means the ability of the business to control General Expenses Ratio is better.

Financial Expenses Ratio

·        During the 2011-2012 periods, the Financial Expenses Ratio decreased from  -0.6% to -0.9%.This means the ability of the business to control Financial Expenses ratio is getting better.

Financial Stability Ratio Interpretation

Working Capital

·         During the 2011-2012 periods, the working capital decreased from 1.59 to 1.44.This means that the business capability to pay off current liabilities is getting worst. In addition it doesn’t have the minimum 2:1 ratio.

Total Debt

·         During the 2011-2012 periods, the total debts decreased from 65.2% to 62.9%.This means the debt of the business is decreasing. However the total debts ratio is over 50%.

Stock Turnover

·         During the 2011-2012 periods, the stock turnover has decreased from 44.1 days to 40.8 days. This means the business is selling their inventory fast.

Debtor Turnover

·         During the 2011-2012 periods, the debtor turnover has decreased 63.5 days to 57.3 days. This means the business collecting debts is getting better.

Interest Coverage

·         During the year 2011-2012, the interest coverage has decreased from 23.9 times to 15.5 times. This means the ability of the business to pay its interest is getting slower. However, the business satisfies the minimum ratio of 5 times.

Price or Earning Ratio Interpretation

The current share price of AUDI AG quoted in the stock market is  627.00 per share. Meanwhile the earnings per share quoted is € 99.65. After calculation, the investors would need to wait around 6 years and 3 months to recoup the investments.

 INVESTMENT RECOMMENDATION

Analysing the profitability of the company, the company showed a slight decrease in the profitability of the company compared to their profitability in the year before. However, overall, the company showed a decreased in their selling, general and financial expenses. This shows that the company is getting better in managing their operating expenses.

Looking at the financial stability of the company, it is determine that the company is slightly unstable. The business’s capability to pay back its current liabilities is getting worse. In addition to that, it does not fulfil the 2:1 ratio for the working capital. However, the company has shown a decrease in total debts even though the debts are more than 50 %. Looking at Stock turnover, we can see that the inventory is selling fast compared to the previous year, it also shows that the business has increase if efficiency in collecting debts.

Based on the Earning Ratio, it shows that the company is in a good state, based on the data, an investor will get his or her investment in a little over six years, which is well below the 15 years limit advisable for people to invest.

Therefore, we think that investing in the company is advisable. Even though the profit experiences a slight decrease and the company is currently a little unstable, the inventory is moving fast. This means that people are buying their products and profit is guaranteed. It is also advisable because the Earning Ratio is only a little over six years. This is a short time and is not over 15 years.

APPENDIX

Company P&L Statement 2011 & 2012

Company Balance Sheet 2011 & 2012

Latest Stock Market Report

REFERENCES

Bibliography

The Audi Story. (2010). 4 Rings, 370. Retrieved May 23, 2013, from http://www.audi-journals.de/eJournals/mz3/default/index_4ringe_en.html#/0

Data CNBC Quotes. (2013, May 23). Retrieved May 23, 2013, from AUDI AG: http://data.cnbc.com/quotes/NSU-DE

Daniels, M. (2000). A Brief History Of The Four Rings. Retrieved May 23, 2013, from http://www.audiworld.com/news/00/audihistory/content.shtml

Alan Millichamp, “Foundation Accounting”, 4^th Edition, DP Publications Ltd, 2003.

Frank Wood and Alan Sangster, Business Accounting, 9^th Edition, Prentice Hall, 2002

** Please forgive me for the missing texts in the boxes. Those are equations.