Case Study of Lehman Brothers-Free-Samples-Myassignmenthelp.com

Question: Explain the basic Principles of Financial Accounting and Management Accounting as they apply to a Business Organization of their Choice. Answer: Introduction During 1844, the German immigrant Henry Lehman started his business journey with the grocery shop in small city of United States. Eventually, the company expanded the capital market through commercial paper trading that led their position as the official dealer of the US treasury (Mensah, 2015). However, the happy days of the company started ending with the 2007 financial year closing. Analysis of financial statement The given case study of Lehman Brothers Holdings Inc. represented their quarterly income statement and the quarterly balance sheet for the financial year 2007-08. The income statement revealed the quarterly financial data for the months of August 2007, November 2007, February 2008, May 2008 and August 2008. Further, the balance sheet revealed the quarterly financial data for the months of August 2007, November 2007, February 2008 and May 2008 (Fleming Sarkar, 2014). It can be identified from the financial statement of the company that the total revenue of the company are in decreasing trend and fell to 2.40 in August 2008 from 14.74 in August 2007. Further, the the company was not able to generate any positive income and their loss after tax for August 2007 was 3.93 whereas the income after tax for that of August 2007 was 0.89. The earnings per share of the company was also in negative for August 2008 and that was 5.93 per share whereas, the EPS for August 2007 was 1.53. The total assets of the company were moving around 5.40 to 5.90 during the period and did not have any considerable change. On the other hand, the liabilities of the company were highest during February 2008 and amounted to 761.21 and it was lowest during May 2008 that amounted to 613.15 (Ahnert Kakhbod, 2017). Therefore, it can be said that the liquidity position of the company were improved. Identification of key ratios and ratio analysis Ratio calculation Ratio Formula Result Aug-07 Nov-07 Feb-08 May-08 Liquidity Ratio Current ratio Current asset /Current liabilities 0.62 0.64 0.63 0.65 Profitability ratio Return on sales ratio Operating profit / Net sales 0.08 0.09 0.06 -0.70 Return on Assets ratio Net sales / Average total assets 0.02 0.02 0.02 0.01 Solvency ratio Debt to equity ratio Total liabilities / Total equity 29.34 29.73 30.66 23.33 Equity ratio Total equity / Total assets 0.03 0.03 0.03 0.04 Analysis of ratio Liquidity ratio The liquidity ratio is calculated for measuring the ability of the company to pay back its current obligations. Further, the current ratio is used for taking rough measurement of financial health of the company. The current ratio of the company is moving around 0.60 to 0.65. Current ratio less than 1 indicates that the company is not in a good position to pay off their short-term, obligations with the available short-term assets. Profitability ratio the profitability ratio of any organization calculates its ability to convert its sales into income. Looking at the profitability ratio of the company, it is identified that return on sales of the company was moving around 6% to 9% till February 2008. However, during next quarter that is May 2008, the company was not even able to generate positive return on sales and the result was loss of 70% which was significantly high. The reason behind this was that the revenue for that quarter fell by more than 50% as compared to February 2008 quarter, whereas the expenses did not fall by this high percentage. Looking at the return on assets ratio of the company, it is identified that the return for the quarter May 2008 was 1%. However, it was consistent at 2% for the last three quarter. The reason for the fall in the return was fall in sales by more than 50% as compared to February 2008 quarter. The profitability ratio of the company is very low and they shall try to conve rt their sales into profit. Solvency ratio the solvency ratios states the ability of the company for making the payments and pay off the long-term liabilities to the shareholders, creditors, banks and financial institutions. Better position of solvency ratio states that the financial status and creditworthiness of the company is sound over the long-term. With regard to the debt to equity ratio, it is considered that lower the ratio better the stability of the company (Stein, 2013). Looking at the above table, it is recognized that the debt to equity ratio of the company is ranging from 20 to 30% that indicates that the company is financially stable. On the other hand, the equity ratio implies the amount of the assets financed through the investment from the owners through the comparison of total equity to the total assets of the company. The ratio states that higher the ratio, better the position of the company. However, the equity ratio of the company is considerably low and amounts to only 3 to 4%. Therefore , it is identified that the equity position of the company is significantly unfavourable. Arguments with regard to the success of the company One of the major reasons behind the failure of Lehman Brothers was the financial crisis. As per the arguments of Andrew Ross Sorkin, the government could save the company but not tried honestly. However, various factors were there that led to the failure of the firm. The reasons are as follows No buyer the very first and major issue was that the lack of buyer. If the other cases like Washinton Mutual, Merrill Lynch, Wachovia or Bear Sterns are considered, it can be recognized that they did not declared bankruptcy as they found buyers. However, Lehman did not found. Further, Bank of America was interested till they found that rather than Lehman they can opt for Merrill Lynch. Disastrous balance sheet as no buyer was there, the 2nd option for Federal Reserve was to overcome the situation through availing the emergency loan. However, the Federal Reserve decided not to lend them as they did not have strong collateral for offering back-up (Kim Song, 2017). As per the arguments, the Fed could have provide the loan, but as per the calculation they were not supposed to provide the loan as it was evidential that the central bank will expose to considerable loss, if they try to revive the institution. No political favour was there for the bailouts - the public was at that point getting to be noticeably impatient with the finance related industry. The possibility that the Treasury or Fed may venture in to salvage a firm like Lehman, and stick citizens with billions of dollars in losses, simply didn't fly politically. With different acquisitions, the losses were figured to be less huge, and an eager acquirer was ready. That way, it didn't appear like the foundation was basically strong, however that regardless it kind of unsuccessful, and was obtained by another bank (Fitzpatrick Thomson, 2016). Failure directly did not affect the average Americans - Obviously, when it came to AIG, no reasons made a difference. It was safeguarded the day after Lehman neglected to the tune of $85 billion. It additionally had no acquirer; its monetary record was likewise a wreck; and its misfortunes could likewise be very huge. However, the alterations to a limited extent, the governmental issues were totally extraordinary (Chen et al., 2013). A disappointment of Lehman would in a roundabout way influence all Americans. Be that as it may, its immediate losses would generally fall on the shoulders of institutional financial specialists and present and previous Lehman speculation investors who held the company's stock. A disappointment of AIG, be that as it may, would straightforwardly influence a colossal number of normal Americans. Impact of political competitive environment The favourable environment of any business is impacted by the circumstances of the economic conditions and financial market of the world. The favourable conditions of the business is characterized by high GDP growth, efficient and transparent capital markets, political conditions, active investors, liquid markets, strong earnings of business and low inflation (Gehrig Haas, 2016). The global environment with regard to the market was favourable for the company as well as for the business during the 2007-08. The favourable condition was the result of various factors like strong market for equity, continuing growth in GDP, tightening of credit spread, active volumes of trade and low interest rate by major central banks. Ethical considerations No one was sure regarding whether the reforms associated with Lehman Brothers were sufficient, whether they went far enough or whether they were dealing with the appropriate issues. Major ethical considerations with regard to Lehman were as follows Mischief during boom times - Standard way of thinking might be that mischief happens when the economy is not doing so great, however in many cases it is the inverse. To keep up a forceful pace of development, officials are regularly enticed to hide the inconveniences. After there is a financial disaster like the recession and organizations begin to fail, misconduct was found that may have occurred during boom. Further, during the boom period when things are going exceptionally well, there is an inclination not to ask regarding the suspicious things (Harris, 2013). Balance sheet tricks - governments and companies frequently utilize balance sheet dishonesty to keep away from full revelation of their finance related issues. That was unquestionably the case with Lehman, which incidentally dispatched resources for London during difficult period to influence advances to seem like income (Ball, 2016). One of the key issues individuals need to consider is if conducts can be actually inside the guidelines and in fact legitimate, it is an exceptionally inconspicuous and nuanced question yet it was an inquiry the researcher should have concentrated on. While implementing the ethical reforms, actual implementation process is as crucial as the original one. To be more specific, the reforms can be designed well, however, it it is not implemented intelligently, it will not be effective and can be unfavourable at the same time (Birkinshaw, 2017). External factors required to be considered Under the present global economy, most of the entities will have to expose themselves to various uncertain pressures from external environment that have considerable impact on the companys human resource aspect. Once successful, Lehman Brothers had a tough time mainly due to sub-prime crisis of mortgage, ongoing issues of contracted liquidity in economy under the banking system and global market of US. This significantly destroyed the operations of the company as the finances were severely impacted (Longworth, 2016). Owing to this, in association with external factors the company had to retrench 6000 of their employees. Further, the HR management of the company required to take into consideration the external factors like technology of the company, strategy, size, strategies of life cycle and structures. It was further recognized that the analysis of HR should have been able to evaluate the HRM policies and strategies to response and adopt the external as well as internal changes wit hin the organization. The company instead of cutting-off their employees could reduce their wages (Dumontaux Pop, 2013). Further, the company required to adopt the HRM strategies with regard to the alterations in external environment that is the job repackaging and temporary plan for the employees lay-off. Conclusion From the above discussion it is concluded that one of the major reasons that led to the significant fall of Lehman Brothers was the subprime crisis during 2007 that eventually led to the collapse of the company during the year 2008. It was recognized that various stakeholders were equally responsible for the crisis and the other responsible factors were excessive leverage, leadership issues, failure of measuring the risks like the value at risk and the poor regulation system of industries related to investment banking. Moreover, the role of some specific derivative instruments was also led to the collapse of the country. Recommendation It is recommended that the company should have managed its operation as per the conceptual framework and proper care should have been taken while dealing with subprime lending along with consideration of value at risk. Further, as the profitability ratio, equity ratio and liquidity ratio of the company were significantly low as compared to the industry standard, Lehman shall take into consideration these facts and try to balance their financial performance through paying off the short-term liabilities and increasing the equity ratio. Reference Ahnert, T., Kakhbod, A. (2017). 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