This report will provide a financial analysis and evaluation of Competition Bikes, Inc financial statements over a select range of financial years reported by the company. The financial analysis will assist the company in identifying strengths and weaknesses, with recommendations in areas of improvement to strengthen its financial position in hopes to induce overall efficiency of operations.
Horizontal analysis results
The horizontal analysis is a method used to analyze changes in the company’s financial health between years in values of dollars and percentages using data from the balance sheet and income statement. In the horizontal analysis a base year is set and then other years are compared to the base year. The horizontal analysis will be used to assess Competition Bikes actual financial operating performance based on the time period between years 6 through 8, with year 6 set as the base year. Starting with an analysis between year 6 and year 7, we look at the horizontal financial changes to determine actual performance by the percentages. Net sales in years 6 and 7 reflect a change of $1,495,000 at a 33% increase change. This change is positive which translates into higher sales which also mean the operating performance was good for the company and customers really liked the products. The cost of goods sold reflects a change of $1,048,000 at a 31% increase change. This percentage is financial strength for company again which means the customer liked the products. This percentage should remain lower than the net sales, and the percentage reflect an added strength for the company because this percentage is lower than net sales, so here the Competition Bikes has control over the cost of making the Bikes to increase revenue. In the same years (6 and 7) the horizontal comparison ratio for gross profits reflected a change of $447,000 which is a positive increase of 37.5%. Therefore, 37.5% of each dollar from sales was retained after the cost of goods was paid for. Since there was an increase in net sales and the cost of goods sold remained lower than net sales, this explains the strong 37.5% increase in gross profit. According to Gitman (2008), “[t]he higher the gross profit margin, the better “and high sales equal higher profits.” In year 7 and year 8 net sales landed at $-897,000 which was a decline of 15%; which is an exponential negative change from years 6 and 7. Along with this, cost of goods sold landed at $-600,400 declining 14.5% and gross profits landed at $-266,600 reporting a decline of 16.3%. Overall, although the company had decreases in all areas of revenue, the declines where in such a proportion that as long as the company focuses on driving the increase in net sales, while keeping the cost of goods sold lower than net sales, the gross profits will increase. To increase sales Competition Bikes could create sales incentives for their authorized distributor network, such as sales contests or gifts for increase in sales to promote up-selling or offering customers a rewards program, which could be used on new purchases, replacements parts and services. Operating expenses are expenses from selling, general and administrative expenses. In years 6 and 7 of the income statement, there was an increase in overall operating expenses of 20.4%. This was an increase change of $156,440. This makes since, as during this time period there was an increase in revenue, so operating expenses would increase meaning the company spent money to make money which is strength for the company. In the balance sheet for years 6 and 7, there was a marginal 2.2% increase in total assets. Although 2.2% is a small change, Competitions Bikes is a small company, so any marginal increase is significant and the balance sheet reflects during this period the majority of the company’s liquid current assets were accounts receivables and this was the main contributor to the increase in the company’s total assets. In year 7...
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