What are the key purposes of using Accounting Ratios in Finance - Free Essay Example

Sample details Pages: 15 Words: 4500 Downloads: 7 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? What is accounting ratios? Accounting ratios are the ratios which used in calculation and indicate the relationship between figures from the financial statements of a company. The financial statements are the statements that summarized a companys activities either quarterly or annually. It consists of a profit and loss account and a balance sheet. Don’t waste time! Our writers will create an original "What are the key purposes of using Accounting Ratios in Finance" essay for you Create order In accounting, accounting ratios are often used in interpreting and evaluating a companys overall financial condition and business performance. Accounting ratios are classified into 5 categories for measuring 5 different aspects of business performance. The 5 aspects are shown as follow: Profitability of company Liquidity of company Asset management of company Debts management and capital gearing of company Market value of investment to ordinary shareholders / common stockholders 1.1 Profitability of company Gross profit markup Gross profit markup (%) = Gross Profit x 100 Cost of goods sold Gross profit margin Gross profit margin (%) = Gross profit x 100 Net sales value Operating profit margin on sales Operating profit margin (%) = Operating profit before interest and before taxation x 100 Net sales value Profit margin on sales Profit margin on sales (%) = Net income available to common stockholders x 100 Net sales value Basic earning power (BEP) Basic earning power (BEP) = Operating profit before interest and before taxation x 100 Total assets Return on total assets (ROA) Return on total assets (ROA) = Net income available to common stockholders x 100 Total assets Return on total equity (ROE) Return on total equity (ROE) = Net income available to common stockholders x 100 Common equity 1.2 Liquidity of company Current ratio / Working capital ratio Current ratio / Working capital ratio = Current assets Current liabilities Liquid ratio / quick ratio / acid-test ratio Liquid ratio / quick ratio / acid-test ratio = Liquid assets Current liabilities 1.3 Asset management of company Inventory turnover or stock turnover Inventory turnover or stock turnover = Cost of sales Average stock value Fixed asset turnover Fixed asset turnover = Net sales Fixed assets net book value Total assets turnover Total assets turnover = Net sales Total assets Debtor ratio Debtor ratio = Debtor Credit sales Debtor payment period Debtor payment period = Debtor x 365 days/ 52 weeks / 12 months Credit sales Days sales outstanding (DSO) Days sales outstanding (DSO) = Debtor x 365 days Credit sales 1.4 Debts management and capital gearing of company Debts ratio Debts ratio = Total debts Total assets Capital gearing ratio Capital gearing ratio = Prior charge debts capital Total capital Debts equity ratio Debts equity ratio = Total debts Common Equity Times interest earned Times interest earned = Profit before interest and before taxation Interest charges Creditor ratio Creditor ratio = Creditor Credit purchase Creditor payment period Creditor payment period = Creditor x 365 days / 52 weeks / 12 months Credit purchase 1.5 Market value of investment to ordinary shareholders/ common stockholders Earnings per share Earnings per share = Net income available to common stockholders Number of ordinary shares in issue Price / Earnings ratio Price / Earnings ratio = Market price per ordinary share Earnings per share Dividend cover Dividend cover = Earnings per share Net ordinary dividend per share Earning yield Earning yield = Gross earnings per share x 100 Market price per ordinary share Dividend yield Dividend yield = Gross ordinary dividend per share x 100 Market price per ordinary share Price / cash flow ratio Price / cash flow ratio = Market price per ordinary share Net cash inflow per ordinary share Market price / book value ratio Market price / book value ratio = Market price per ordinary share Net book value per ordinary share 1.6 Companys background Gamuda was incorporated on 6 October 1976. It was listed on the main board of the Kuala Lumpur Stock Exchange (KLSE) on 10 August 1992. In Malaysia, Gamuda is a leading infrastructure group. It has a wide range of business activities all over the world. Its core competencies are engineering and construction, infrastructure concessions, and also township development. Besides, they have mega projects such as internationally acclaimed SMART (Stormwater Management and Road Tunnel), intra-urban highways, Kaohsiung Mass Rapid Transit System in Kaohsiung, Taiwan, and so on. On the other hand, WCT was incorporated on 14 January 1981 as WCT Earthworks Building Contractors Sdn Bhd. Then, it went public on 1 April 1994 and listed on the Kuala Lumpur Stock Exchange (KLSE) on 16 February 1995. The business nature of WCT Berhad contains engineering and construction, property development, and also assets management. The business coverage of WCT is in Malaysia and abroad. Its projects and serv ices include F1 international racing circuit, international airport, hydroelectric dam, township planning development and so on. Then, the next step is applying the accounting ratios to calculate the 2 companiess business performance. The companies are Gamuda Berhad and WCT Berhad. In order to compare these 2 companies, the selection is inter-firm which is comparing based on the industry average. It is because they have the same business nature. Before doing comparison, a person must obtain the financial statements of a company. In general, the financial statements are released in annually basis, but some of the companies are quarterly basis. Financial statements are the vital resource for a researcher used to calculate and compare the companies business performance. The financial statements adopted from Gamuda Berhads annual report 2010, whereas WCT Berhad is 2009. Figures inside the income statement and balance sheet are used in apply to the accounting ratio in calculating pu rposes. After done the calculation, there is a standard weigh available in each accounting ratio to interpret the data. Each answer generated is referring to the weigh in comparison and generate a comment. These 2 annual reports of Gamuda and WCT are adopted from their official website in the column of the investor relations. The website address of Gamuda is https://www.gamuda.com.my, whereas website address of WCT is www.wct.com.my. 1.7 Calculation worksheet Types of ratio Calculation of Gamuda Berhad Calculation of WCT Berhad Profitability Gross profit markup (%) = Gross profit x 100 Cost of goods sold = RM 422976000 x 100 RM 2032167000 = 20.81 % = RM 354659000 x 100 RM 4311943000 = 8.23 % Gross profit margin (%) = Gross profit x 100 Net sales value = RM 422976000 x 100 RM 2455143000 = 17.23 % = RM 354659000 x 100 RM 4666602000 = 7.60% Operating profit margin on sales (%) Operating profit before = interest before taxation x100 Net sales value = RM 259852000 x 100 RM 2455143000 = 10.58% = RM 244145000 x 100 RM 4666602000 = 5.23 % Profit margin on sales (%) = Net income available to common stockholders x 100 Net sales value = RM 280693000 x 100 RM 2455143000 = 11.43 % = RM 147098000 x 100 RM 4666602000 = 3.15 % Basic earning power (BEP) = Operating profit before Interest and before taxation x100 Total assets = RM 259852000 x 100 RM 6550910000 =3.97% = RM 244145000 x 100 RM4478484 000 = 5.45 % Return on total assets (ROA) = Net income available to common stockholders x100 Total assets = RM 280693000 x 100 RM 6550910000 = 4.28% = RM 147098000 x 100 RM 4478484000 = 3.28 % Return on total equity (ROE) =Net income available to common stockholders x 100 Common equity = RM 280693000 x 100 RM 325752500 = 8.62 % = RM 147098000 x 100 RM 1250246000 = 11.77 % Liquidity Current ratio = Current assets Current liabilities = RM 4203173000 RM 1930241000 = 2.18 : 1 = RM 2553187000 RM 1807550000 = 1.41 : 1 Acid-test ratio = Liquid assets Current liabilities =RM4123435000 RM1930241000 = 2.14 : 1 = RM 2439478000 RM 1807550000 = 1.35 : 1 Asset Management Inventory turnover = Cost of sales Average stock value = RM 2032167000 RM 79738000 = 25.49 times = RM 4311943000 RM 113709000 = 37.92 times Total assets turnover = Net sales Total assets = RM 2455143000 RM 6550910000 = 0.37 times = RM 4666602000 RM 4478484000 = 1.04 times Debtor ratio =Debtor Credit sales = RM 1607772000 RM 2455143000 = 0.65 : 1 = RM 1472655000 RM 4666602000 = 0.32 : 1 Day sales outstanding (DSO) =Debtor x 365 days Credit sales = 0.65 x 365 days = 237.52 days = 0.32 x 365 days = 116.8 days Debts management and capital gearing of company Debts ratio = Total debts Total assets = RM 3243187000 RM 6550910000 = 0.50 : 1 = RM 2991508000 RM 4478484000 = 0.67 : 1 Debts equity ratio = Total debts Common equity = RM 3243187000 RM 3257525000 = 1 : 1 = RM 2991508000 RM 1250246000 = 2.39 : 1 Times interest earned = Profit before interest and before taxation Interest charges = RM 259852000 RM 43813000 = 5.93 times = RM 24414500 RM 50308000 = 4.85 times Market value of investment to ordinary shareholders / common stockholders Earnings per share = Net income available to common stockholders Number of ordinary shares in issues = RM 280693000 2025888000 shares = RM 0.14 = RM 147098000 777712000 shares = RM 0.19 Price earnings ratio = Market price per ordinary share Earnings per share = RM 3.20 per share RM 0.14 per share = 22.86 times = RM 2.60 per share RM 0.19 per share = 13.68 times Earnings yield = Gross earnings per share x 100 Market price per ordinary share = (100/75 x RM 0.14) x 100 RM 3.20 = 5.83 % = (100/75 x RM 0.19)x 100 RM 2.60 = 9.74 % Market price per book value = Market price per ordinary share Net book value per ordinary share = RM 3.20 per share (RM 325752500 / 2025888000 shares) = RM 3.20 RM 1.61 = 1.99 : 1 = RM 2.60 per share (RM 1250246000 / 777712000 shares) = RM 2.60 RM 1.61 = 1.61 : 1 1.8 Ratios comparison between Gamuda and WCT 1.81 Profitability Gross profit markup and gross profit margin Based on the profitability ratios calculations result generated above, Gamuda Company is generating higher profit compared to WCT Company. The both gross profit markup and gross profit margin of Gamuda is higher than WCT. High gross profit earned by Gamuda shows that it has effective and efficient control in lowering its purchasing cost and production cost. Lower gross profit earned by WCT indicates it does not effective and efficient control in lowering its purchasing cost and production cost. Besides, both operating profit margin and profit margin on sales of Gamuda is higher than WCT. Higher profit margin earned by Gamuda shows it has an effective control in lowering its expenditures and interest cost. Whereas it indicates WCT is ineffective in controlling its expenditures and interest cost. Basic earning power, return on total assets, and return on common equity However, in basic earning power and return on common equity, Gam uda is lower than WCT. Return of asset of Gamuda is slightly higher 1 % than WCT only, which is 4.28 % and 3.28 % respectively. It shows that WCT is generating higher profit regarding to its effective and efficient in using its assets and capital in the business. In contrast, Gamuda is ineffective and inefficient in employing its assets and capital. 1.82 Liquidity Current ratio In liquidity aspect, the current ratio of Gamuda and WCT is 2.18: 1 and 1.41: 1 respectively. If the current ratio is higher than average of industry, it means a company has a larger amount of current assets to pay its current liabilities. Besides, it proves that a company has a stable financial condition. In contrast, when current ratio is lower than average of industry, it shows the companys financial condition is unstable. The company has lower amount of current assets to pay its current liabilities. Acid test ratio On the other hand, acid test ratio of Gamuda is 2.14: 1, whereas WCT is 1.35: 1. When a companys acid test ratio is higher than average of industry, it shows that it has larger amount of liquid assets to pay its current liabilities. In contrast, lower acid test ratio shows a company has lower amount of liquid assets to pay its current liabilities. 1.83 Asset management Inventory turnover In asset management aspect, the inventory turnover of Gamuda is 25.49 times and WCT is 37.92 times. Higher inventory turnover shows that a company experiences fast stock turnover, so stocks are not accumulated, and no money to be tied up. WCT has a higher inventory turnover than Gamuda. It means that WCT has fast turnover, less stocks to be accumulated, and less money to be tied up compared to Gamuda. Total assets turnover Besides, total assets turnover of Gamuda is 0.37 times, and WCT is 1.04 times. Total assets turnover of WCT is higher than Gamuda. WCT has higher sales generated from its business due to its effective asset usage which increases the production volume. Debtor ratio days sales outstanding Debtor ratio of Gamuda is 0.65: 1, and WCT is 0.32: 1. Besides, the day sales outstanding of Gamuda are 237.5 days, and WCT is 116.8 days. Higher debtor ratio and day sales outstanding shows that Gamuda gives a longer credit time to its debtors w hich cause a longer time to collect back the money. Gamuda may accumulate the debts balance and experiences shortage of money which unable to finance its current liabilities. In contrast, WCT has a lower debtor ratio and day sales outstanding. It has shorter debtor payment period, experience less debts balance, and less money to be tied up from its debtors. 1.84 Debts management and capital gearing Debtor ratio In debts management and capital gearing aspect, WCT has a higher debts ratio compared to Gamuda. The higher debts ratio shows that a company experiences heavy debts and high interest cost. It may cause a company unable to pay back the debts, and forced to sell its assets to pay. Debts equity ratio Debts equity ratio is used to measure the proportion of company debts with its common equity. Both Gamuda and WCT debts equity ratio is higher than 0.5:1, but WCT is higher than Gamuda which are 2.39:1 and 1;1 respectively. It means these 2 companies operate at a high gear with larger proportion of prior charge debts capital. It views as unstable capital structure and bearing the high interest cost financed by larger proportion of profit. Time interest earned / Interest cover Both companies experience high capital gearing ratio, but WCT is higher than Gamuda. It means WCT experiences low times interest earned and indicates it is bearing the high interest charge s in relation to its profit. 1.85 Market value of investment to ordinary shareholders / common stockholders Earnings per share Lastly, in market value of investment to ordinary shareholders / common stockholders, WCT has a higher earnings per share compared to Gamuda. It shows that WCT has a higher business growth and higher profit earnings. In converse, lower earnings per share shows that a company experiences a low business growth and low profit earnings. Price earnings per share Besides, WCT has a lower price earnings ratio compared to Gamuda. Lower price earnings ratio shows that Gamudas earnings per share is very high which influenced the common stockholders have to take shorter period use their profit earning to recover back their share investment amount. If the earnings ratio is high, it shows that a companys earnings per share are very low and the common stockholders spend longer period use their profit earning to recover their share investment amount. Earning yield The earning yield of WCT is higher than Gamuda. If the earning yield higher than the average of indu stry, it shows that a company has high net income and very attractive to the common stockholders. However, when the earning yield is lower than average of industry, it shows that a company has low net income and not attractive to the common stockholders. Market price per book value Besides, the market price per book value of WCT is lower than Gamuda. If market price per book values is lower than the average of industry, it means the share market price decreases below its real asset value and becomes attractive to common stockholders. In converse, if the market price per book value is higher than the average of industry, it means its share market price increases over its real asset value and become not attractive to the common stockholders. 1.9 Conclusion Based on the result of 5 aspects of accounting ratio above, WCT Company has a better overall business performance than Gamuda Company. Firstly, WCT has higher BEP and ROE which shows WCT is generating higher profit regarding to its effective and efficient in using its assets and capital in the business activities. Secondly, WCT has a higher inventory turnover than Gamuda. It indicates that WCT has fast turnover, more liquid, less stocks to be accumulated, and less money to be tied up compared to Gamuda. Thirdly, total assets turnover of WCT is higher than Gamuda. WCT has higher sales generated from its business due to its effective asset usage which increases the production volume. Fourthly, WCT experiences a lower debtor ratio and day sales outstanding than Gamuda Company. WCT has shorter debtor payment period, experience less debts balance, more liquid and less money to be tied up from its debtors. Fifthly, WCT has higher earnings per share compared to Gamuda. WCT has a higher bu siness growth and higher profit earnings. Sixthly, WCT experiences lower price earning ratio compared to Gamuda. Lower price earnings ratio shows that WCTs earnings per share are very high. It enables the common stockholders have to take shorter period use their profit earning to recover back their share investment amount. Seventhly, the earning yield of WCT is higher than Gamuda. When the earning yield higher than the average of industry, it shows that a company has high net income and very attractive to the common stockholders. Lastly, the market price per book value of WCT is lower than Gamuda. When market price per book values is lower than the average of industry, it means the share market price decreases below its real asset value and becomes attractive to common stockholders. Thus, WCT is more attractive than Gamuda. On the other hand, while doing inter-firm comparison, there are several limitations in applying the ratio and trend analysis. The first limitation must select the same industry norms and compare based on the industry average. The second limitation is each firm experiences a different financial and business risk profile. It also affected by the analysis differently. The third limitation is accounting policies. Each firm applies different accounting policies. For example, in small firm, it groups its stationery in current assets. However, in large firm, it groups it into expenses. The fourth limitation is the size of the firm would experience different level of risk from its competitors, structure, and returns. The fourth limitation is the area and environment of a firm. Home-based firm and multinational firm operate differently in different countries. 2.0 Introduction What is financial market? Financial market is a mechanism where surplus funds are gathered from the people who intended to lend out their money. Furthermore, it acts like a platform where provides the opportunities for the organizations and individuals who are short of money to borrow funds. Financial markets have different categories. Each financial market deals with a different type of financial instrument of its maturity and the asset backing it. Different financial markets serve different types of customers, and operate in different parts of the country. Financial markets are different from physical asset markets. Physical asset markets also called as tangible asset markets or commodities market which deal with the physical products like gold, crude oil, real estate, and machinery. Whereas the financial markets deal with the financial instruments like shares, bonds, notes, mortgages, and so on. Besides, these 2 markets can operate as the spot market or future market. Spot marke rs can be defined as goods are being traded on the spot and delivery within several days. Conversely, the goods that are being traded in future market are for future and delivery on future date. It could be six months or a year in future. 2.1 Types of financial markets 2.11 Primary markets There are various financial markets in each country. The first type is primary markets. It is the market for corporations to raise capital by issuing new securities or shares. The corporations collect the funds by selling off the new issued stocks in the primary market transaction. 2.12 Secondary markets The second type is secondary markets. Secondary markets are the markets in which existing and already outstanding securities or other financial assets that are traded among the investors after they have been issued by the corporations. 2.13 Initial public offering market The third type is initial public offering (IPO) market. It is a market that provides the company or corporations go public by offering new securities or shares to the public for the first time. Once the corporation or company went public, it will be listed on the stock exchange. These companies or corporations are usually newly established and go public to collect capital. 2.14 Private markets The fourth type is private markets. It is a financial market where the transactions are worked out directly between 2 parties. Private markets are different from the public markets where standardized contracts are traded on organized exchanges, but private market could perform privately without going to public where the transaction may be structured in any manner that appeals to the 2 parties. Bank loans and placement of debts with insurance are the examples of the private market transaction. 2.15 Consumer credit markets The fifth type is consumer credit markets. Generally, it deals with the loans on autos and appliances, loans for education, vacations, and so on. 2.16 Mortgage markets The sixth type is mortgage markets. Mortgage markets deal with the loans for the purposes of residential, commercial, industrial real estate, and also farmland. 2.17 capital markets The seventh type is capital market. Capital markets deal with the stocks or shares, intermediate or long-term debts in which funds to be loaned and borrowed for long periods. It usually more offered in one year or more than one year. 2.18 Money market The eighth type is money market. Money market deals with short-term, highly debt securities in which funds to be loaned and borrowed for a short period which usually less than one year. 2.2 Three ways for transferring capital or fund between savers and borrowers 2.21 Direct transfer from savers to borrowers The first way is direct transfer from savers to borrowers. It usually happens when a corporation (borrower) wants to collect funds by issuing and selling new securities or bonds to the savers (money lender). In this selling process, it does not pass through any financial institution which the corporations directly deliver the securities to the savers who in return pay money to the corporation. Therefore, it is a direct flow where the funds are directly transferred from the savers to the corporations. The following diagram can fully explain the process between corporations and savers. Issue corporations securities or bonds to Corporations (Borrowers) Savers (Money lenders) Receive capital or fund from Diagram 2.21.1- Direct transfer from savers to borrowers 2.22 Indirect transfer from the savers to the borrowers through investment banking house The second way is indirect transfer from the savers to the borrowers through investment banking house. It normally happens when an investment bank underwrites the issuance of a corporations securities where the investment bank acts as a middleman to facilitate the issuance of corporations securities. Indeed, investment bank purchases the corporations securities and then resell it to the savers. It means the money paid by the savers in purchasing corporations securities is passed to the investment bank and to be received by the corporation (borrower). Thus, money of savers and securities of company is only passing through the investment banking house. As a result, the fund is indirectly transferred through the investment banking house from the saver (money lender) to the corporation (borrower). The below diagram can fully explain the process among the investment banking house, corporation, and saver. Investment Banking House (Middle man) ( Corporations (Borrower) Savers (Money lender) Issue corporations Resell corporations securities to securities to Receive fund from Receive fund from Diagram 2.22.1- Indirect transfer from the savers to the borrowers through investment banking house 2.23 Indirect transfer from the savers to borrowers through a financial intermediary The third way is indirect transfer from the savers to borrowers through a financial intermediary. It usually happens when a financial intermediary like bank or a mutual fund collects the funds from the savers by issuing its own securities or certificate of deposit to the savers. After that, the financial intermediary uses the collected funds from the savers to buy and keeps the other corporations securities as its investments. It means that the money paid by the savers to purchase the securities or certificate of deposit issued by the financial intermediary. Then, the money passed to the financial intermediary, and then the financial intermediary paid the money for purchasing the other corporations securities. In fact, there are many people prefer holding the certificate of deposit and the securities issued by the financial intermediary. The reason is they are safer and more liquid than the mortgages and loans. Thus, financial intermediaries are greatly increasing the efficiency of money and capital markets. The below diagram can fully explain the process among the financial intermediary, saver, and corporation. Savers (Money lender) Corporations (Borrower) Financial Intermediary (Money lender to corporation) / (Borrower from saver) Issue corporations Issue intermediarys securities to owns securities to Receive fund from Receive fund from Diagram 2.23.1- Indirect transfer from the savers to borrowers through a financial intermediary 2.3 Types of financial intermediaries and its role Investment banking house is an organization that underwrites and distributes the new securities issued by the corporations which helps the corporation in obtaining the funds for financing. In Malaysia, examples of investment banking house are CIMB bank, Affin bank, and Maybank. Financial intermediary are the specialized financial organization that facilitate the transfer of funds from the savers to the borrowers. There are several types of financial intermediaries. 2.31 Commercial bank The first type is commercial bank. It is a traditional departmental store of finance which serves a huge population of savers and borrowers. Besides, commercial banks are the major institutions that handled checking accounts and through which Federal Reserve System increased or decreased the money supply. Furthermore, it provides stock brokerage services and insurance. 2.32 Mutual savings fund The second type is mutual savings fund. It is similar to savings and loan associations which accepts the funds from savers and lend the money for a long term basis to house buyers and consumers. 2.33 Savings and loan association The third type is savings and loan association. This organization serves individual savers, residential and commercial mortgage borrowers by collecting the funds from small savers. Then, it lends the money to house buyers and other types of borrowers. 2.34 Credit unions The fourth type is credit unions. They are cooperative associations whose members are supposed having a common bond to enable the unions collect funds from the members. Then, the unions lend the funds to other members who need funds in vehicle purchases, house improvement, and house mortgage. It is the cheapest source of funds for the individual borrowers. 2.35 Pension funds The fifth type is pension funds. It is a retirement plan funded by the corporation or government agencies for their staffs. Pension funds are administered primarily by the trust departments of commercial banks or by life insurance companies. It normally used in investing in bonds, stocks, mortgages, and real estate. 2.36 Life insurance companies The sixth type is life insurance companies. These companies collect the savings in the form of annual premiums and invest the funds in purchasing stocks, bonds, real estate, and so on. They make payments for the beneficiaries who are injured. Life insurance companies also offered a variety of tax-deferred savings plans to provide benefits to the applicants when they retire. 2.37 Mutual funds The seventh type is mutual funds. They collect the fund from savers and use it in purchasing stocks, long-term bonds, and short-term debt instruments issued by businesses or government units. They pool the funds in diversifying the investment to reduce the risk. 2.4 Conclusion After finished this question, it provides a clear picture and more understanding in financial markets and its categories. Financial market is a mechanism where surplus funds are gathered from the people who intended to lend out their money. Furthermore, it acts like a platform where provides the opportunities for the organizations and individuals who are short of money to borrow funds. Financial markets have different categories. There are primary market, secondary market, initial public offering (IPO) market, private market, consumer credit markets, mortgage market, capital market, and also money market. Besides, it also indicates 3 different ways in transferring capital or fund between savers and borrowers. The first way is direct transfer from savers to borrowers. The second way is indirect transfer from the savers to the borrowers through investment banking house. The third way is indirect transfer from the savers to borrowers through a financial intermediary. On the other hand , it also indicated the roles of investment banking house and financial intermediaries. Financial intermediaries consist of 7 types. They are commercial banks, mutual saving funds, savings and loan association, credit unions, pension funds, life insurance companies, and also mutual funds. 2.5 Appendix

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Commercial Law Assessment for Battery - MyAssignmenthelp.com

Question: Discuss about theCommercial Law Assessmentfor Battery and Nuisance. Answer: Issue Can the manufacturer and distributor of Samsung Galaxy Note 7, be held liable as per the tort of negligence, towards the Australian consumers? Rule A tort depicts that something has been done wrong, which attracts civil liability, instead of a criminal liability. Under the common law of tort, are different liabilities, arising from defamation, battery, nuisance, negligence, etc (Statsky, 2011). The provisions regarding negligence are contained not only under the common law, but also under the statutory legislation, i.e., under the Wrongs Act, 1958 (Vic). As per section 18 of this act, in order to establish that an individual had been indulged in a negligent act, certain points have to be established. These include, the failure in adopting the precautions which were necessary to deal with the risk of harm, the risk to be foreseeable in a reasonable manner and the same not being insignificant, and lastly, that in similar situation, similar precautions would have been applied by a prudent person (Legislation, 2010). Under the common law, negligence is considered as a failure of duty, which an individual owes to the other, due to the work being done by them, and which results in a loss or harm to the other person. In order to establish that an incident of negligence did take place, three basic elements have to be there, and these comprise of the duty of care, breach of this duty and the resultant injury, loss or harm (Gibson Fraser, 2014). Apart from these three basic elements, there are some additional elements, which also need to be there, to establish a case of negligence in a successful manner. These include that there has to be a presence of direct causation. This causation has to be between the loss incurred by the other person, and the breach of duty on part of the negligent person (Legal Services Commission, 2016). Apart from this, the loss has to be substantial and cannot be too remote. And the last aspect is that the risk of injury, or the loss, was foreseeable or predictable in a reas onable manner. Once, all these elements are present in an incident, a successful claim for negligence can be made by the party who was injured (Bailey, 2016). The first requirement is to show that a duty of care was indeed present. For the duty of care owed by the manufacturers to their consumers, was established in the issue of Donoghue v Stevenson [1932] UKHL 100. In this case, the plaintiff was Mrs. Donoghue, who drank the ginger beer bottle which was manufacturer by Stevenson, the manufacturer. In this bottle, a dead snail was found, due to which, when Donoghue consumed the bottle, she fell sick. The manufacturer in this case, claimed that he did not owe any duty to a consumer, when the same was being consumed whilst the consumer was in a caf. However, the Court was of the view that there was a clear breach of duty on part of Stevenson, as he failed to ensure that the bottle was safe for the consumption of his consumer. And as a result of this, the negligence of the manufacturer attracted damages for him (Latimer, 2012). To further clarify on the presence of duty of care, the threefold test given in the case of Caparo Industries plc v Dickman [1990] 2 AC 605, 618, given by the Court of Appeal, is helpful. The judges held that the duty of care is present when there is proximity between the party who has been injured and the breach of duty by the individual who owed duty of care; the imposed penalty to be reasonable, just and fair; and lastly, the loss to be reasonably foreseeable (Lunney Oliphant, 2013). In the issue of Bolton v. Stone [1951] AC 850, [1951] 1 All ER 1078 is one of such cases, where due to the absence of reasonable foreseeability in the defendants conduct, the damages were not awarded by the court to the defendant, as he was not held to have committed the tort of negligence (Swarb, 2016). Followed by an establishment of duty of care, the violation of the duty of care needs to be established. In Vaughan v Menlove (1837) 132 ER 490 (CP), the defendant was warned over and again regarding the poor ventilation in his building, which could result in a possible fire to the haystack. Due to the lack of the defendant in considering these warnings, he was held to have violated his duty of care and hence, negligent (Commonwealth Legal Information Institute, 2017). In the case of Paris v Stepney Borough Council [1951] AC 367, the Council was aware of the fact that Paris had one bad eye. And even then they did not provide him with any sort of protective gear. So, when a rusted bolt flew and hit his working eye, Paris was completely blinded. This was held to be a breach on Councils part and hence, they were held as negligent by the court (Martin Lancer, 2013). After establishing these two elements, the loss has to be shown, along with the other three elements highlighted above. So, the foreseeability, loss being not too remote and direct causation has to be present. In the Wagon Mound Case, which is otherwise known as the Overseas Tankship (UK) Ltd v Morts Dock and Engineering Co Ltd [1961] UKPC 2, the relief in form of damages were not ordered, as the loss was held to be too remote (H2O, 2016). In Wyong Shire Council v. Shirt (1980) 146 CLR 4, the view of a reasonable individual, to judge the risk of injury taking place was taken and it was held that the particular risk was indeed reasonably foreseeable and hence, a claim for negligence was held to be successful (Jade, 2017a). Application The number of cases highlighted in the previous segment highlight certain elements for establishing a case of negligence. In the given case study, the manufacturer and distributor owed a duty of care towards the Australian Consumers, which was breached when the phone exploded and people were injured in a significant manner, due to the malfunctioning of the product. Hence, all the elements were present. Also, as per Donoghue v Stevenson, a claim of negligence is further strengthened. Overheating is a common problem in devices which makes the loss foreseeable. Conclusion As all of the elements are present, for establishing the case of negligence, the manufacturer and distributor of Samsung Galaxy Note 7, can be held successfully liable under the tort of negligence, towards the Australian consumers. Issue Can the manufacturer and distributor of the product be held liable under the ACL, as per the rights which are available to the Australian Consumers? Rule The Competition and Consumer Act 2010 (CCA) is a key legislation in Australia for ensuring the fairness in competition. Schedule 2 of the CCA, contains the provisions regarding the Australian Consumer Law (ACL), which presents the need for carrying the business in a fair manner and making certain that the consumers are protected (Coorey, 2015). Due to the applicability of ACL, the consumers are protected from unfair contractual terms, false representations, misleading or deceptive conduct, unconscionable conduct, unfair contractual terms, and the like (Corones, 2012). For establishing a claim against the manufacturer or distributor, the requirement of being a manufacturer as per section 7 of this act has to be fulfilled. As per this section a manufacturer includes a person who holds himself as being in this position, who extracts, grows, assembles, produces or processes the goods, along with certain other requirements. The requirement of being a supplied, as per section 2, also has to be fulfilled. However, it is not required that the individual is a consumer as per section 3 of ACL. The safety defect, which attracts the provisions under this act, has to be as per section 9 of the Australian Consumer Law (Australasian Legal Information Institute, 2017). The provisions contained under the Part 3-5 of the ACL, make the manufacturer liable for the safety defect found in the products manufactured by such manufacturer. Under section 138 off ACL, the liability for the loss or harm which another person had to bear, has to be borne by the manufacturer, when the goods manufactured by the manufacturer, contains some kind of safety defect, and which led to the injury to the person. Under this section, the liability on the manufacturer is also imposed for the resulting death of such an injured person. Section 139 of ACL provides that the manufacturer is liable to such an individual for their loss, who incurs such loss, due to the injury of another person or such another persons death, owing to the safety defect in the manufactured product of the manufacturer. Section 140 fixes the liability for the safety defect over the manufacturer due to the goods being destroyed, or them being damaged. And for the liability for the damages to building, land or fixtures, the liability arising due to safety defect is covered under section 141 of the Australian Consumer Law (Australasian Legal Information Institute, 2017). The liability of the manufacturer can be established through the case of Glendale Chemical Products Pty Ltd v Australian Competition Consumer Commission Anor [1998] FCA 1571. Boiling water was put down the slower pipe by P and after this he put in the dry Glendale Caustic Soda through this very pipe. Consequently, P eyes and face was burnt. When the case was made under Part 3-5 of the ACL, P was held to be successful against D. The raison d'tre behind holding D liable was his responsibility of labeling and repackaging the bulk caustic soda, as a result of which, he was considered as a manufacturer under the provisions of ACL (Jade, 2017b). The manufacturers also have been protected under this act, through the defenses available to them, under section 142 of the ACL. In case a manufacturer can show that the product did not have any defect when the same was supplied, than the section 142(a)(iii) protects them from any liability raised by the consumer. A defense can also be established by showing compliance with the applicable standards. Similarly, section 142(c) of the ACL protects the manufacturer when they can show that the defect could not be established as per the technical and scientific knowledge available to them. Under section 142(d), the defense of a defect or careless assembly, as a result of the omission or an act of the manufacturer of the finished goods, can also be made by the manufacturer of the product (Australasian Legal Information Institute, 2017). Application The present case study reveals different consumers who can initiate a claim against the manufacturer and distributor of the device. The manufacturer is liable as they created and formed the product and the distributor is liable in accordance with the case of Glendale Chemical Products Pty Ltd v Australian Competition Consumer Commission Anor. As, for different consumers, different sections highlighted above were breached, the claims made against the manufacturer and distributor of the device, would result in attraction of damages to be payable to the individuals making the claim. Even though the manufacturer and distributor can make defense under section 142, the same would not be much successful, due to the large-scale failure of the product. Conclusion So, manufacturer and distributor can be held liable under the ACL, as per the rights which are available to the Australian Consumers. Issue Are there any applicable caps over the personal injuries damages, in the present case, for the claims highlighted in the previous parts? Rule In 2015, the Wrongs Act, 1958 (Vic) was amended through the Wrongs Act, 2015, which resulted in changes to the provisions pertaining to the claims raised for personal injuries in the jurisdiction of Victoria. Through this amendment act, there has been a reduction in the threshold for the impairment for psychiatric and spinal injuries. Hence, an individual who suffers from is equal to or at 10% impairment for psychiatric injuries and at or equal to 5%, for the spinal injuries, can claim damages for non-economic losses, when the same were not available previously. Under section 28G of the Wrongs Act, 1958, the cap has been increased to a value of $577,050 (Thomas, 2015). Though, some restrictions have been placed for recovering non-economic losses, in terms of suffering or pain. Moreover, for a claim to be made under this act, it has to be shown that a significant injury did take place (Law Handbook, 2015). The economic loss related provisions, as contained in section 28F(2) have also been modified. The maximum amount of damages, which can be awarded after the amendment, is the amount equal to three times the average minimum weekly earnings of the person. Before the cap is applied for the claims raised by dependent of a deceased person, a deduction for the personal living expenses of such a deceased person have to be made. Under section 28ID, the damages owing to the loss of capacity of some other person have now been allowed (Thomas, 2015). Application The individual, who have been affected due to the explosion of device, along with the hotel, where the furniture was damaged, can make claim in this case (Griffith, 2016). Plus, they can seek both economic and non-economic damages, as per the limits prescribed above. Conclusion Hence, there are certain applicable caps over the personal injuries damages, in the present case, for the claims highlighted in the previous parts. References Australasian Legal Information Institute. (2017). Competition and Consumer Act 2010 - Schedule 2. Retrieved from: https://www.austlii.edu.au/au/legis/cth/consol_act/caca2010265/sch2.html Bailey, J. (2016). Construction Law (2nd ed.). Oxon: Routledge. Commonwealth Legal Information Institute. (2017). Vaughan v Menlove. Retrieved from: https://www.commonlii.org/uk/cases/EngR/1837/424.pdf Coorey, A. (2015). Australian Consumer Law. London, United Kingdom: LexisNexis Butterworths. Corones, S.G. (2012). The Australian Consumer Law. New South Wales: Lawbook Company. Gibson, A., Fraser, D. (2014). Business Law 2014 (8th ed.). Melbourne: Pearson Education Australia. Griffith, C. (2016). Exploding Samsung Note7 ruins Australian hotel room. Retrieved from: https://www.theaustralian.com.au/business/technology/exploding-samsung-note7-ruins-australian-hotel-room/news-story/093d67da670f8c1ed20df88aafbb2f66 H2O. (2016). Wagon Mound (No. 1) -- "The Oil in the Wharf Case". [Online] Retrieved from: https://h2o.law.harvard.edu/collages/4919 Jade. (2017a). Wyong Shire Council v. Shirt. Retrieved from: https://jade.io/article/66842 Jade. (2017b). Glendale Chemical Products Pty Ltd v Australian Competition Consumer Commission Anor[1998] FCA 1571; 90 FCR 40. Retrieved from: https://jade.io/j/?a=outlineid=116054 Latimer, P. (2012). Australian Business Law 2012 (31st ed.). Sydney, NSW: CCH Australia Limited. Law Handbook. (2015). Key legislation: the Wrongs Act. Retrieved from: https://www.lawhandbook.org.au/10_01_02_key_legislation_the_wrongs_act/ Legal Services Commission. (2016). Negligence. Retrieved from: https://www.lawhandbook.sa.gov.au/ch01s05.php Legislation. (2010). Wrongs Act 1958. Retrieved from: https://www.legislation.vic.gov.au/Domino/Web_Notes/LDMS/LTObject_Store/LTObjSt5.nsf/DDE300B846EED9C7CA257616000A3571/F1F5385B484503F3CA2577C1001B5BE4/$FILE/58-6420a103.pdf Lunney, M., Oliphant, K. (2013). Tort Law: Text and Materials (5th ed.). Oxford: Oxford University Press. Martin, J., Lancer, D. (2013). AQA Law for AS Fifth Edition (5th ed.). Oxon: Hachette UK. Statsky, W.P. (2011). Essentials of Torts (3rd ed.). New York: Cengage Learning. Swarb. (2016). Bolton v Stone: HL 10 May 1951. Retrieved from: https://swarb.co.uk/bolton-v-stone-hl-10-may-1951/ Thomas, K. (2015). Significant changes to personal injuries legislation in Victoria. Retrieved from: https://www.sparke.com.au/insights/significant-changes-to-personal-injuries-legislation-in-victoria/