Financial Ratios
Task: You have been appointed as the new Management Accountant for Electronic Arts Limited. Considering the increased competition in the sector as well as the COVID-19 pandemic implications (people spending more time at home), you were asked to advise the Board of Directors on a number of issues in order to inform decisions which would support Electronic Arts Limited’s (EA) future growth. Please ensure that your report is informed by EA’s strategy and business model (please check EA’s website and Annual Reports for this information). Required: Produce a management report to the Board of Directors outlining the following: Standard costing and Variance Analysis. Analysing the performance for the last financial year, EA has realised there were deviations from forecasted budgets. Advise on which variances should the company focus on, what are potential issues with using standard costing and how standard costing can be used to assess and improve managerial performance. (500 words) – 20 marks Ratio analysis. Choose FOUR categories from the list of five categories of financial ratios below and use ONE financial ratio from each category to assess the financial health of EA using past 3-year financial information (2017-2019). Discuss the problems and limitations of financial ratios as a tool of financial analysis before making recommendations to the board of directors regarding the investment decision. The ratio categories are as follows: Profitability Efficiency Liquidity Financial gearing Investment (500 words) – 25 marks Develop a Balanced Scorecard for EA and critically evaluate how (whether) it could be used to support future growth; (500 words) – 25 marks Divisional performance. EA currently uses Residual Income (RI) to compare divisional performance and market price for transfer prices between divisions. Advise on the advantages and limitations of these methods and, if appropriate, recommend alternative methods for setting transfer prices and measuring divisional performance. (500 words) – 20 marks
