In order to ascertain how well a company is performing, analyses must be done in regard to the business being stable, including its’ ability to pay debts, how much cash or other liquid assets are available, and whether the organization is viable enough to continue operations. These analyses typically look at income statements, balance sheets, and statements of cash flow, where current and past performance will be studied with the goal of predicting how the company will perform in the future.
There are four ways in which the Competition Bikes will be evaluated. First, we will look at a horizontal analysis. This is a comparative study of a balance sheet or income statement for two or more accounting periods, to compute both total and relative variances for each line item. (businessdictionary.com) Second, the company will be judged based on a vertical analysis. This is done by way of financial statement analysis in which each entry for the three major categories of accounts -- assets, liabilities and equities in a balance sheet, is represented as a proportion of the total account. (investopedia.com) The third method we will use to evaluate the bike company is through trend analysis. This type of analysis is often employed to identify current and future movements of an investment or group of investments, and may involve comparing past and current financial ratios as they relate to various institutions in order to project how long the current trend will continue. (wisegeek.com) And last, a ratio analysis will be studied by looking at the broad method by which financial data is converted into simple mathematic ratios for comparison. (ratioanalysis.org)
When looking at Competition Bikes Inc, we will be comparing their sixth and seventh years, and then their seventh and eighth years. This will allow us to gauge the performance over a significant period of time to see if the organization’s business is rising, staying steady or falling. For example, if net sales were ten thousand dollars in year one, and eleven thousand dollars in year two, this would be seen as a ten percent increase.
Using the horizontal analysis worksheet, we see that Competition Bikes realized an increase in net sales between years six and seven by over thirty percent. This was followed in years seven and eight by a decline of fifteen percent. While the net sales in year eight were better (+13%) than year six, sales did fall from the previous year. Another key indicator to look at is gross profits, where the difference between net sales and the cost of goods sold is calculated. In our case, for years six and seven we see an increase of over thirty seven percent, but a decrease of over sixteen percent between years seven and eight. This could be caused by either selling less, through an increase in the cost of goods sold, or a combination of the two.
One very important aspect when examining how any business is able to make and sustain profitability is the operating cycle. This looks at how quickly a company is turning over their receivables, inventory and payables. By lowering the operating cycle, businesses are able to manage their assets more efficiently. Using figures derived from days inventory outstanding, days sales outstanding and days payable outstanding, a business can determine how long inventory is staying in the pipeline, and how long it is taking to sell and collect payment on that inventory. This is done by finding the cost of goods sold (from income statement) and dividing by 365, which will yield the sales per day. Then determining the average inventory (from balance sheet) by adding previous inventory plus ending inventory and dividing by 2, and finally, taking the result of the average inventory and dividing by the cost of sales per day. For Competition Bikes this results in a figure that shows a decrease over the course of two years. Lower is better, and clearly signals that sales are increasing in comparison to...
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