ACC 146 Sustainability and Strategic Audit

Students’ Activity Sheet #18

Name: _____________________________________________________________ Class number: _______

Section: ____________ Schedule: ______________________________________ Date: ______________

Lesson title: Performance Analysis Materials:

Lesson Objectives: Student Activity Sheets
1. Understand the performance audit
2. Discuss the benchmarking process References:
3. Discuss the ration analysis https://www.tutor2u.ne

Study Tip: It’s good to be intense. Not all studying is equal. You will accomplish more if you study
intensively. Intensive study sessions are short and will allow you to get work done with minimal wasted
effort. Shorter, intensive study times are more effective than drawn out studying.

A. LESSON PREVIEW/REVIEW
1) Introduction
Hello Buddy! Today we are to discuss the performance audit. Do you have any idea in this??
Answer activity number 1.

2) Activity 1: What I Know Chart

What do you know about this topic? Try answering the questions below by writing your ideas
under the What I Know column. You may use key words or phrases that you think related to the
questions.

What I Know Questions: What I Learned (Activity 4)

What is benchmarking?

What is ratio analysis?

 ACC 146 Sustainability and Strategic Audit
Students’ Activity Sheet #18

B. MAIN LESSON
Activity 2: Content Note
Performance Analysis

The resource audit, value chain analysis and core competence analysis help to define the strategic
capabilities of a business. After completing such analysis, questions that can be asked that evaluate
the overall performance of the business. These questions include:

• How have the resources deployed in the business changed over time? This is historical analysis
• How do the resources and capabilities of the business compare with others in the industry? This
is industry norm analysis
• How do the resources and capabilities of the business compare with "best-in-class" - wherever
that is to be found? This is benchmarking
• How has the financial performance of the business changed over time, and how does it
compare with key competitors and the industry as a whole? This is ratio analysis

The Benchmarking Process

Benchmarking involves looking outward (outside a particular business, organisation, industry, region or
country) to examine how others achieve their performance levels, and to understand the processes
they use.

In this way, benchmarking helps explain the processes behind excellent performance. When lessons
learned from a benchmarking exercise are applied appropriately, they facilitate improved performance
in critical functions within an organisation or in key areas of the business.

The application of benchmarking involves four key steps:

1. Understand in detail existing business processes

2. Analyse the business processes of others
3. Compare own business performance with that of others analysed
4. Implement the steps necessary to close the performance gap

Benchmarking should not be considered a one-off exercise. To be effective, it must become an integral
part of an ongoing improvement process, the goal being to abreast of ever-improving best practice.

Types of Benchmarking
Strategic Benchmarking
Used when businesses need to improve overall performance, strategic benchmarking examines the
long-term strategies and general approaches that have enabled high-performers to succeed
It involves considering high level aspects such as core competencies, developing new products and
services, and improving capabilities for dealing with changes in the external environment
Changes resulting from this type of benchmarking may be difficult to implement and take a long time to
materialize

Performance or Competitive Benchmarking

Used when businesses wish consider their position in relation to performance characteristics of key
products and services
Benchmarking partners are drawn from the same sector
This type of analysis is often undertaken through trade associations or third parties to protect
 ACC 146 Sustainability and Strategic Audit
Students’ Activity Sheet #18
confidentiality

Process Benchmarking
Focuses on improving specific critical processes and operations
Benchmarking partners are sought from best practice organizations that perform similar work or deliver
similar services
Involves producing process maps to facilitate comparison and analysis
Often results in short term benefits

Functional Benchmarking
Businesses look to benchmark with partners drawn from different business sectors or areas of activity
to find ways of improving similar functions or work processes
Can lead to innovation and dramatic improvements

Internal Benchmarking
Involves benchmarking businesses or operations from within the same organization, for example
business units in different countries
Three main advantages of internal benchmarking are: (1) access to sensitive data and information is
easier (2) standardized data is often readily available and (3) usually, less time and fewer resources are
needed
Fewer barriers to implementation as practices may be relatively easy to transfer across the same
organization.
Real innovation may be lacking, and best in class performance is more likely to be found through
external benchmarking

External Benchmarking
Involves analyzing outside organizations that are known to be best in class
Provides opportunities of learning from those who are at the "leading edge"
Can take up significant time and resources to ensure the comparability of data and information, the
credibility of the findings and the development of sound recommendations

International Benchmarking
Best practitioners are identified and analyzed elsewhere in the world, perhaps because there are too
few benchmarking partners within the same country to produce valid results
Globalization and advances in information technology are increasing opportunities for international
projects. However, these can take more time and resources to set up and implement, so the results
may need careful analysis due to national differences

The Ratio Analysis

Ratio analysis involves the calculation and interpretation of key financial performance indicators to
provide useful insights.

Financial information is always prepared to satisfy in some way the needs of various interested parties
(the "users of accounts"). Stakeholders in the business (whether they are internal or external to the
business) seek information to find out three fundamental questions:

(1) How is the business trading?

(2) How strong is the financial position?
(3) What are the future prospects for the business?
 ACC 146 Sustainability and Strategic Audit
Students’ Activity Sheet #18
For outsiders, published financial accounts are an important source of information to enable them to
answer the above questions.

To some degree or other, all interested parties will want to ask questions about financial information
which is likely to fall into one or other of the following categories, and be about:

Profitability
• Is the business making a profit?
• How efficient is the business at turning revenues into profit?
• Is it enough to finance reinvestment?
• Is it growing?
• Is it sustainable (high quality)?
• How does it compare with the rest of the industry?
Financial efficiency
• Is the business making best use of its resources?
• Is it generating adequate returns from its investments?
• Is it managing its working capital properly?
Liquidity and gearing
• Is the business able to meet its short-term debts as they fall due?
• Is the business generating enough cash?
• Does the business need to raise further finance?
• How risky is the finance structure of the business?
Shareholder returns
• What returns are owners gaining from their investment in the business?
• How does this compare with similar, alternative investments in other businesses?

Activity 3: Skill building

KPC Co. has the following balance sheet:

BALANCE SHEET 2020 2019 2018 Industry Average

ASSET
Cash and Mkt. Securities 5.77% 9.30% 12.13% 6.30%
Accounts Receivables 11.54 16.4 15.77 26.4
Inventory 50 37.5 31.85 25.6
CURRENT ASSETS 67.31 63.2 59.76 58.3

Property Plant and Equipment 26.92 29.9 33.06 35.7

Other Assets 5.77 6.9 7.18 6
LONG TERM ASSETS 32.69 36.8 40.24 41.7

TOTAL ASSETS 100 100 100 100

LIABILITIES
Notes Payable 12.21 15 14.16 13.9
Current Portion of LTD 4.33 5 7.08 3.6
Accounts Payable 38.46 30 24.27 18.7
 ACC 146 Sustainability and Strategic Audit
Students’ Activity Sheet #18
BALANCE SHEET 2020 2019 2018 Industry Average
Accrued Liabilities 8.46 9.58 8.8 6.8
CURRENT LIABILITIES 63.46 59.58 54.3 43

Long Term Debt 19.09 20.42 25.88 13.4

TOTAL LONG TERM DEBT 19.09 20.42 25.88 13.4

EQUITY
Equity 17.45 20 19.82 43.6

TOTAL DEBT AND EQUITY 100 100 100 100

Based on the above information, answer the following:

1. What is the current ratio? How is it compared to other entities? Using current ratio, is the
Company Solvent??

2. What is the quick ratio?? How is it compared to other entities? Using quick ratio, is the Company
Solvent??

Activity 4: What I Know Chart

Now let us check your final understanding of practitioner’s engagements. I hope that everything about
the topic is clear to you. This time you must fill out the What I Learned column.

Activity 5: Check for understanding:

True or False

1. Benchmarking involves looking outward (outside a particular business, organization,

industry, region or country) to examine how others achieve their performance levels, and
to understand the processes they use.
2. Strategic Benchmarking is most appropriate for re-aligning business strategies that have
become inappropriate.
 ACC 146 Sustainability and Strategic Audit
Students’ Activity Sheet #18
3. Performance or Competitive Benchmarking is most appropriate for assessing the relative
level of performance in key areas or activities in comparison with others in the same
sector, and finding ways of closing gaps in performance.
4. Process Benchmarking is most appropriate for achieving improvements in key
processes to obtain quick benefits
5. Functional Benchmarking is most appropriate for improving activities or services for
which counterparts do not exist.
6. Internal Benchmarking is most appropriate for several business units within the same
organization exemplify good practice, so management want to spread this expertise
throughout the organization, quickly.
7. External Benchmarking is most appropriate when examples of good practices can be
found in other organizations, and there is a lack of good practice within internal business
units.
8. International Benchmarking if most appropriate where the aim is to achieve world class
status, or simply because there are insufficient "national" businesses against which to
benchmark.
C. LESSON WRAP UP

You are done with this session! Let’s track your progress. Shade the session number you just
completed.

Activity 6: Think about learning! 🤔

1. Please read again the learning targets for the day. Were you able to achieve those learning targets?
If yes, what helped you achieve them? If no, what is the reason for not achieving them?
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

2. In today’s session, which part of the lesson was least clear to you?
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
_______________________________________________

FAQs
Why financial ratio is important?
- Ratios measure companies' operational efficiency, liquidity, stability and profitability, giving investors
more relevant information than raw financial data. Investors and analysts can gain profitable
advantages in the stock market by using the widely popular, and arguably indispensable, technique of
ratio analysis
 ACC 146 Sustainability and Strategic Audit
Students’ Activity Sheet #18
KEY TO CORRECTION
Activity 3:
1. The current ratio is 1.06 which suggests the firm is just solvent, but the ratio is near the lower
quartile of firms in the industry
2. The quick ratio is 0.27 suggesting the firm is insolvent without relying on inventory. KPC Co’s quick
ratio is in the lower quartile of firms in the industry indicating the firm is less solvent than most of its
competitors.

Activity 5:
1. True 5. True
2. True 6. True
3. True 7. True
4. True 8. True