TASK 1 – FINANCIAL STATEMENT ANALYSIS AND CONTROLS
Requirements for Task 1:
A. Prepare a summary report in which you do the following:
1. Evaluate the company’s operational strengths and weaknesses based on the following:
In order to evaluate company’s operational strength and weaknesses accurately it is important to have access to more than one year worth of data. The company, of course, will not be evaluated on the basis of couple of ratios, it is very important to analyze all the available information to put pieces of puzzle together to see the overall impression of the company and its attractiveness to creditors, investors and stockholders. To be able to compare company’s performance we will be evaluating three years period from year to year, for which Horizontal technique will be used; and comparing it with results of company’s biggest competitor. Vertical Analysis technique will be used as a standard way for comparison. Then to see how company does in comparison to the competition, we will use Ratio Analysis in which biggest competitor’s numbers will be reviewed. It is important to have several different analyses to see the entire picture and later to be able to understand where company is and what actions shall be chosen for the improvement of financial situation.
a. Review the horizontal analysis, analyze the results, and discuss operational areas of concern.
First we will use Horizontal Analysis, which is a study of percentage changes in comparative financial statements to look at revenue, selling and operating expenses, income, earnings, assets, liabilities and equity. The reason this method is important is because we can see how company does percentage wise. It gives us better understanding of success then just numbers along. We will be comparing 3 years: year to year in different periods: 8(current), 7 (middle) and the year prior, we will be referring to it as year 6. By looking at current year revenue result we determine that net sales dropped by 15% from $5980.00 to $5083.00 in comparison to previous year. When we look at the year 6 and compare it to the year 7 we see that at that time period a very significant increase of 33% took place. At any point increase in sales is a positive change, it is strength. From year 7 to year 8 a decrease of 15% takes place. Decrease in sales is a weakness, yet the company is still more profitable than year 6. In this case comparison of 15% and 33% is more informative then just numbers alone ($897.000 and 1495.000). Next line cost of goods sold can give us a bit of an explanation on why this has happened: From year 6 to year 7 cost of making bikes nearly tripled- costs of sales grew by a very large percent of 31.8%. Rise of this sort is a big weakness. From year 7 to year 8 company managed to get the cost under control reducing it by 14.5%, which is a step up in a good direction. Gross profit increased by 37.5% from year 6 to 7 $1191, 000 to $1638, 000, which is a sign of strength; and then dropped by 16.3% to $1371, 400. The question that rises is what changes took place, what good decisions were made that resulted in rise from year 6 to year 7, and what unfavorable actions the company decided to take that resulted in the drop? Drop is gross profit can partially be explained by increase of cost of goods sold. But what other questionable decisions company made? To determine that we need to look further and review company’s operating expenses. $6000.00 is one constant number we see throughout three years is the cost of website creation and maintenance. Company was spending highest amount 37.5% on advertisement from year 6 to year 7. Year 7 was most successful year for the company, which supported by net sales and gross profit data. Then Competition Bikes decreased amount spent on advertisement by 16.3%, which was immediately reflected. It was a poor decision as advertisement plays a major role in company’s success...