Task 2 Financial Analysis
TASK TWO Task Two
1
A1. Concerns in Budget Planning: Budgetary Items. Depreciation: Depreciation is “the method that the accountants use to allocate the cost of equipment and other assets to the total cost of products and services as shown on the income statement” (Berman, Knight, & Case, 2013). Depreciation is said to be based on the same fundamentals as accruals in that a company “wants to match as closely as possible the costs of products and services with what was sold” (Berman et al., 2013). The idea is to spread the cost of the expenditure over the useful life of the item over the course of time (Berman et al., 2013). Depreciation carries too much of an increase in year 9. Year 8 totals for accumulated depreciation is at (-690,000). By year 9, depreciation is too fast and rises to a higher negative amount at (-920,000). There are ways to correct this issue. Competition Bikes could utilize new methods to determine fundamental accounting equations that would help to increase the company’s “equity in the form of retained earnings” (Berman et al., 2013). For example, leases could be re-financed and lengthened to record a smaller charge on the statement year to year (Berman et al., 2013). Other equipment could be re-financed or re-valued in order to decrease operational costs and depreciation. For example, delivery trucks could be evaluated. If Competition Bikes determined that those trucks could last six years instead of three, then “a 50 percent smaller charge on its income statement” could be recorded (Berman et al., 2013). Liabilities: Liabilities are “what a company owes to other entities” (Berman et al., 2013). Liabilities can also describe how a company obtains its assets because they show up in different explanations on the balance sheet (Berman et al., 2013). For example, long-term liabilities are “those that come due
TASK TWO over a longer time frame” and short-term liabilities are due over a short time frame (Berman et al., 2013). For
1
A1. Concerns in Budget Planning: Budgetary Items. Depreciation: Depreciation is “the method that the accountants use to allocate the cost of equipment and other assets to the total cost of products and services as shown on the income statement” (Berman, Knight, & Case, 2013). Depreciation is said to be based on the same fundamentals as accruals in that a company “wants to match as closely as possible the costs of products and services with what was sold” (Berman et al., 2013). The idea is to spread the cost of the expenditure over the useful life of the item over the course of time (Berman et al., 2013). Depreciation carries too much of an increase in year 9. Year 8 totals for accumulated depreciation is at (-690,000). By year 9, depreciation is too fast and rises to a higher negative amount at (-920,000). There are ways to correct this issue. Competition Bikes could utilize new methods to determine fundamental accounting equations that would help to increase the company’s “equity in the form of retained earnings” (Berman et al., 2013). For example, leases could be re-financed and lengthened to record a smaller charge on the statement year to year (Berman et al., 2013). Other equipment could be re-financed or re-valued in order to decrease operational costs and depreciation. For example, delivery trucks could be evaluated. If Competition Bikes determined that those trucks could last six years instead of three, then “a 50 percent smaller charge on its income statement” could be recorded (Berman et al., 2013). Liabilities: Liabilities are “what a company owes to other entities” (Berman et al., 2013). Liabilities can also describe how a company obtains its assets because they show up in different explanations on the balance sheet (Berman et al., 2013). For example, long-term liabilities are “those that come due
TASK TWO over a longer time frame” and short-term liabilities are due over a short time frame (Berman et al., 2013). For
References: Berman, K., Knight, J., and Case, J. (2013). Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean. Boston, MA: Harvard Press. Bragg, S. (2013). What is a Flexible Budget? Accounting Tools. Retrieved 10 June 2013 from http://www.accountingtools.com/questions-and-answers/what-is-a-flexible-budget.html. Bragg, S. (2013). What is Management by Exception? Accounting Tools. Retrieved 10 June 6 2013 from http://www.accountingtools.com/questions-and-answers/what-is-managementby-exception.html. Bragg, S. (2013). What is Variance Analysis? Accounting Tools. Retrieved 10 June 2013 from http://www.accountingtools.com/questions-and-answers/what-is-variance-analysis.html.