Agriculture Reference
In-Depth Information
Suppose that Neil Gray, controller of the Dixie Manufacturing Company, notes that
accounts receivable for December stands at $349,000. That fi gure in and of itself may have
little signifi cance. However, if he notes that last year's December accounts receivable was
$270,000, he can be alerted to a potential problem or opportunity (see
Table 10.1)
.
There are many possible reasons for this change. More questions (and answers) may well
be needed to provide suffi cient information for the manager. Product prices could simply
have gone up 29 percent, thereby raising the value of accounts receivable, or the total sales
for the year could have been 29 percent higher. On the other hand, Neil may need to more
carefully monitor the payments of the accounts receivable and then consider changes in the
credit policy of the fi rm.
The critical issue is that a simple comparison with a past period gave the fi gure added
signifi cance. This simple and easily prepared comparison is one of the best methods for
identifying points where the manager should raise questions. To evaluate this properly, Neil
needs the answers to several questions. Has the fi rm changed its credit policy? Have sales
increased signifi cantly over this time period? Which of Dixie's accounts represent the bulk
of the $349,000 in receivables due their fi rm? Has this changed in the past year? Answers to
these and similar questions will help Neil determine if any action is necessary. So Neil
would fi nd the answers to the questions posed, identify the cause of the deviation, and then,
if needed, take corrective action(s).
Performance measures can also be compared to industry averages. Various trade organi-
zations, universities, governmental agencies, consulting fi rms, etc., collect, compile and ana-
lyze industry data. Such reports can also be used for comparative purposes.
The fi nancial statements and the budgeted forecasts provide another excellent compari-
son. This is particularly true if the former is an income statement.
Table 10.2
presents income
statement information in a useful manner for comparative purposes. The fi rst column con-
tains the previous year's actual fi gures for sales, cost of goods, gross margin, and expense
data. The second set of columns contains this year's budgeted fi gures. In other words, these
data represent Pacey's fi nancial goals for the current period. The third set of columns of
fi nancial information illustrates the actual amounts for the current year. The fi nal two sets of
columns present similar information—budgeted and actual—for the most recent quarter.
Management of Pacey farm store can compare actual operating results to the budget and
previous year's fi gures to indicate relative performance in cost control (expenses), buying
(cost of goods), and pricing (sales). Cursory analysis indicates Pacey has a signifi cant gross
margin problem. Currently, gross margin is about $4,600 under the budgeted goal for this
point during the period ($42,810, year-to-date, actual, versus $47,439, year-to-date, budget).
Both the pricing decisions and buying practices must be reviewed to determine what specifi c
problems exist.
Table 10.1
Dixie manufacturing company comparative balance sheets
Current Assets
December 31, 2010 ($)
December 31, 2009 ($)
Cash
272,000
210,000
Marketable Securities
380,000
395,000
Accounts Receivable
349,000
270,000
Inventory
550,000
610,000
Total Current Assets
1,551,000
1,485,000
