Company's economics - Essay Example

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Contents The Garden Place 2 T A/Cs 2 INCOME MENT 4 Balance Sheet 5 VERTICAL ANALYSIS 6 COMPANY A 6 BALANCE SHEET 6 COMPANY A 7 INCOME MENT 7 VERTICAL ANALYSIS 7 COMPANY A - CASH FLOW STATEMENT 8 VERTICAL ANALYSIS 8 COMPANY B 9 BALANCE SHEET 9 VERTICAL ANALYSIS 9 COMPANY B 11 INCOME STATEMENT 11 VERTICAL ANALYSIS 11 COMPANY B 12 CASH FLOW STATEMENT 12 VERTICAL ANALYSIS 12 COMPANY A 15 INCOME STATEMENT 15 COMPANY A- HORIZONTAL ANALYSIS- CASH FLOW STATEMENT 16 Evaluation of Company A and B: 17 Bibliography 18 The Garden Place T A/Cs Cash A/c Apr1 2011 Common stock 60,000 Truck 2000 Apr1 2011 Loan 32000 Display Equipment 6000 Apr1 2011 Sales 340000 Rototiller 400 Cash Register 3600 Inventory 60000 Purchases 200000 Advertising Expenses 20000 Rent 7200 Telephone 1200 Utilities 4800 Payroll 112000 Loan-1 (336x12) 4032 Bal C/d 1392 Loan-2 (8000+4160) 12160 Common Stock A/C Interest A/C Bal c/d 60000 Cash 60000 Cash 4160 Profit/Loss A/c 4160 Loan A/C Pickup Truck A/c Cash 4032 Cash 32000 Cash 2000 Cash 8000 Pickup Truck 10000 Loan 10000 Bal c/d 12000 Bal C/d 29968 Display Equipment A/C Debtors A/C Cash 6000 Bal C/d 6000 Sales 60000 Balc/d 60000 Rototiller A/c Rent A/C Cash 400 Bal c/d 400 Cash 7200 Profit/Loss A/c 7200 Cash Register A/C Telephone Expense A/C Cash 3600 Cash 1200 Profit/Loss A/C 1200 Inventory A/C Utilities A/C Cash 60000 Cost of Sales 240000 Cash 4800 Profit/Loss A/C 4800 Cash 200000 Bal c/d 20000 Payroll A/C Sales A/C Cash 112400 Profit/Loss A/C 112400 Cash 340000 Profit/Loss A/c 400000 Debtors 60000 Advertising Expense Cash 20000 Profit/Loss A/C 20000 THE GARDEN PLACE INCOME STATEMENT FOR THE YEAR ENDED MARCH 31 2007 $ $ Sales 400,000 Less: Cost of Goods Sold Opening stock 60000 Purchases +200000 Stock available for sale 260000 Less: closing stock (20000) Cost of goods sold (240000) Gross profit 160000 Less: Expenses Interest expense 4160 Advertising expense 20000 Rent 7200 Telephone 1200 Utilities 4800 Payroll 112000 (149360) Net Income 10640 Balance Sheet VERTICAL ANALYSIS COMPANY A BALANCE SHEET 2011 2010 Assets $ % $ % Current Assets Cash 4274 1.58% 1270 1% Trade Accounts Receivables 56504 20.95% 41174 22% Inventories 184113 68.26% 132196 70% Deferred tax payment 3384 1.25% 2611 1% Other current assets 11053 4.10% 8795 5% Total current assets 259328 96.14% 186046 98% Advance to supplier, net of imputed interest 4479 1.66% 0 0% Preferential supply agreement 521 0.19% 0 0% Long term financing cost, net of amortization 1360 0.50% 0 0% Property and equipment, net 4060 1.51% 4078 2% Total assets 269728 100.00% 190124 100% Liabilities and shareholders’ equity Current liabilities Notes payable 154424 57.25% 100447 53% Current maturities 160 0.06% 15131 8% Trade accounts payable 50054 18.56% 31482 17% Income tax payable 4060 1.51% 6143 3% Accrued expense and derivative liabilities 4089 1.52% 10537 6% Dividends payable 231 0.09% 0 0% Total current liabilities 213018 78.98% 148760 78% Mortgage payable 1461 1621 1% Subordinated convertible debt net of unamortized discount 9501 0.54% 0 0% Derivative liability for embedded conversion option 1934 3.52% 0 0% Deferred tax payable 212 0.72% 0 0% Stakeholders Equity Common stock$0.1 par value, 20000000 shares authorized and 11749651 issued Dec31 2011 and 2010 117 0.04% 117 0% Additional paid in capital 11937 4.43% 11937 6% Retained Earnings 35271 13.08% 31235 Accumulated other comprehensive loss (214) -0.08% (96) 0% Treasury stock 2511245 and 2490745 shares at Dec31 2011 and 2010 (3509) -1.30% (3450) -2% Total shareholders’ equity 43602 16.17% 39743 21% Total liabilities and shareholders’ equity 269728 100.00% 190124 100% COMPANY A INCOME STATEMENT VERTICAL ANALYSIS $ % $ % Net Sales 514633 100.00% 465013 100.00% Cost of goods sold 490102 95.23% 434785 93.50% Gross Profit 24531 4.77% 30228 6.50% Selling, general and administrative expense 13336 2.59% 12031 2.59% Operating income before impairment recovery 11195 2.18% 18197 3.91% Impairment recovery 0 0.00% 346 0.07% Operating income 11195 2.18% 18543 3.99% Other income/expense Change in value of derivative liability 896 0.17% 0 0.00% Interest expense (4039) -0.78% (3997) -0.86% Income before income taxes 8052 1.56% 14546 3.13% Income taxes 3091 0.60% 5401 1.16% Net income 4961 0.96% 9145 1.97% 2011 2010 COMPANY A - CASH FLOW STATEMENT VERTICAL ANALYSIS 2011 2010 Cash flow from operating activities $ % $ % Net income 4961 116.07% 9145 720.08% Adjustments to reconcile net income to net cash in operating activities Depreciation and amortization 434 10.15% 374 29.45% Change in value of derivative liability (896) -20.96% 0 0.00% Amortization of convertible note discount 330 7.72% 0 0.00% Impairment recovery 0 0.00% (346) -27.24% Provision for doubtful debts 207 4.84% 0 0.00% Deferred income taxes (564) -13.20% (32) -2.52% Foreign exchange loss, and others (11) -0.26% 155 12.20% Changes in: Restricted cash 0 0.00% 2149 169.21% Trade account receivable (15584) -364.62% (13245) -1042.91% Inventories (52368) -1225.27% (17564) -1382.99% Other current assets (2332) -54.56% (6240) -491.34% Trade accounts payable 18569 434.46% (1542) -121.42% Income tax payable (2083) -48.74% 4440 349.61% Accrued expense and derivative liabilities (6451) -150.94% (21873) -1722.28% Net cash used in operating activities (55788) -1305.29% (44579) -3510.16% Cash flows used in investing activities Advance related to supply agreement (5000) -116.99% 0 0.00% Net proceeds from sale of property and equipment 0 0.00% 346 27.24% Purchases of property and equipment (84) -1.97% (27) -2.13% Net cash flow from investing activities (5084) -118.95% 319 25.12% Cash flows provided by financing activities Proceeds from subordinated convertible debt 12000 280.77% 0 0.00% Proceeds from notes payable 54935 1285.33% 46691 3676.46% Repayment- mortgage payable (151) -3.53% (141) -11.10% Dividends paid (694) -16.24% (2085) -164.17% Deferred financing cost (1596) -37.34% 0 0.00% Treasury stock purchased (59) -1.38% (83) -6.54% Stock options exercised 0 0.00% 18 1.42% Tax benefit from stock options exercised 0 0.00% 11 0.87% Net cash provided by financing activities 63895 1494.97% 44411 3496.93% Net increase in cash 3023 70.73% 151 11.89% Effect of exchange rate (19) -0.44% (23) -1.81% Cash at beginning of the year 1270 29.71% 1142 89.92% Cash at end of the year 4274 100.00% 1270 100.00% COMPANY B BALANCE SHEET VERTICAL ANALYSIS 2012 2011 Assets $ % $ % Current Assets Cash and cash equivalents 40355 27.05% 16623 11.05% Trade accounts receivable 25807 17.30% 27670 18.40% Inventories 34136 22.88% 57438 38.19% Prepaid expenses and other current assets 4194 2.81% 4965 3.30% Total current assets 104492 70.05% 106696 70.94% Property plant and equipment, net 21669 14.53% 20663 13.74% Intangible assets 1257 0.84% 3072 2.04% Cash surrender value of life insurance policies 16217 10.87% 15026 9.99% Other assets 5536 3.71% 4954 3.29% Total assets 149171 100.00% 150411 100.00% Liabilities and shareholders’ equity Current liabilities Trade accounts payable 9233 6.19% 11785 7.84% Accrued salaries, wages and benefits 3855 2.58% 3426 2.28% Other accrued expenses 792 0.53% 1111 0.74% Accrued dividends 1078 0.72% 1077 0.72% Total current liabilities 14958 10.03% 17399 11.57% Deferred compensation 7100 4.76% 6242 4.15% Total liabilities 22058 14.79% 23641 15.72% Shareholders’ Equity Common stock, no par value, 20000 shares authorized, 10793 issued and outstanding 17262 11.57% 17161 11.41% Retained earnings 109742 73.57% 109000 72.47% Accumulated other comprehensive income 109 0.07% 609 0.40% Total shareholders’ equity 127113 85.21% 126770 84.28% Total liabilities and shareholders’ equity 149171 100.00% 150411 100.00% COMPANY B INCOME STATEMENT VERTICAL ANALYSIS 2012 2011 2010 $ % $ % $ % Net Sales 222505 100.00% 215429 100.00% 203347 100.00% Cost of Sales 173642 78.04% 168047 78.01% 154931 76.19% Casualty loss 0 0.00% 2208 1.02% 0 0.00% Insurance recovery 0 0.00% (1708) -0.79% 0 0.00% Total cost of sales 173642 78.04% 168547 78.24% 154931 76.19% Gross profit 48863 21.96% 46882 21.76% 48416 23.81% Selling and admin expenses 40375 18.15% 41022 19.04% 41956 20.63% Restructuring charges 0 0.00% 1403 0.65% 0 0.00% Intangible asset impairment charges 1815 0.82% 396 0.18% 1274 0.63% Operating income 6673 3.00% 4061 1.89% 5186 2.55% Other income/expenses 272 0.12% 108 0.05% (99) -0.05% Income before income tax 6945 3.12% 4169 1.94% 5087 2.50% Income taxes 1888 0.85% 929 0.43% 2079 1.02% Net income 5057 2.27% 3240 1.50% 3008 1.48% COMPANY B CASH FLOW STATEMENT VERTICAL ANALYSIS 2012 2011 2010 Cash Flow from operating activities $ % $ % $ % Cash received from customers 224577 556.50% 213850 1286.47% 207819 546.96% Cash paid to supplier and employees 190365 471.73% (226986) -1365.49% (169245) -445.44% Insurance proceeds received on casualty loss 0 0.00% 1708 10.27% 0 0.00% Income taxes paid (1987) -4.92% (3938) -23.69% (1401) -3.69% Interest received (paid) net 51 0.13% (93) -0.56% (327) -0.86% Net cash from operating activities 32276 79.98% (15459) -93.00% 36846 96.98% Cash flow from investing activities Purchases of property, plant and equipment (3805) -9.43% (2010) -12.09% (1678) -4.42% Proceeds received from notes payable 35 0.09% 31 0.19% 30 0.08% Proceeds from the sale of property, plant and equipment 125 0.31% 0 0.00% 337 0.89% Premiums paid on life insurance policies (1144) -2.83% (1346) -8.10% (556) -1.46% Proceeds received from life insurance policies 560 1.39% 1724 10.37% 739 1.94% Net cash used in investing activities (4229) -10.48% (1601) -9.63% (1128) -2.97% Cash flow from financing activities Proceeds from short term borrowing 0 0.00% 0 0.00% 4859 12.79% Payments on short term debt 0 0.00% 0 0.00% (4859) -12.79% Cash dividends paid (4315) -10.69% (4312) -25.94% (4309) -11.34% Payments on long term debt 0 0.00% 0 0.00% (5218) -13.73% Net cash used in financing activities (4315) -10.69% (4312) -25.94% (9527) -25.07% Net increase/decrease in cash 23732 58.81% (21372) -128.57% 26191 68.93% Cash at the beginning of the year 16623 41.19% 37995 228.57% 11804 31.07% Cash at end 40355 100.00% 16623 100.00% 37995 100.00% COMPANY A- HORIZONTAL ANALYSIS- BALANCE SHEET COMPANY A INCOME STATEMENT HORIZONTAL ANALYSIS 2011 $ 2010 $ Difference %change Net Sales 514633 465013 49620 0.106707 Cost of goods sold 490102 434785 55317 0.127228 Gross Profit 24531 30228 -5697 -0.18847 Selling, general and administrative expense 13336 12031 1305 0.10847 Operating income before impairment recovery 11195 18197 -7002 -0.38479 Impairment recovery 0 346 -346 -1 Operating income 11195 18543 -7348 -0.39627 Other income/expense Change in value of derivative liability 896 0 896 Interest expense (4039) (3997) -42 0.010508 Income before income taxes 8052 14546 -6494 -0.44645 Income taxes 3091 5401 -2310 -0.4277 Net income 4961 9145 -4184 -0.45752 COMPANY A- HORIZONTAL ANALYSIS- CASH FLOW STATEMENT 2011 2010 Difference % change Cash flow from operating activities $ $ $ Net income 4961 9145 -4184 -45.75% Adjustments to reconcile net income to net cash in operating activities 0 Depreciation and amortization 434 374 60 16.04% Change in value of derivative liability (896) 0 -896 Amortization of convertible note discount 330 0 330 Impairment recovery 0 (346) 346 -100.00% Provision for doubtful debts 207 0 207 Deferred income taxes (564) (32) -532 1662.50% Foreign exchange loss, and others (11) 155 -166 -107.10% Changes in: 0 Restricted cash 0 2149 -2149 -100.00% Trade account receivable (15584) (13245) -2339 17.66% Inventories (52368) (17564) -34804 198.16% Other current assets (2332) (6240) 3908 -62.63% Trade accounts payable 18569 (1542) 20111 -1304.22% Income tax payable (2083) 4440 -6523 -146.91% Accrued expense and derivative liabilities (6451) (21873) 15422 -70.51% Net cash used in operating activities (55788) (44579) -11209 25.14% Cash flows used in investing activities 0 Advance related to supply agreement (5000) 0 -5000 Net proceeds from sale of property and equipment 0 346 -346 -100.00% Purchases of property and equipment (84) (27) -57 211.11% Net cash flow from investing activities (5084) 319 -5403 -1693.73% Cash flows provided by financing activities 0 Proceeds from subordinated convertible debt 12000 0 12000 Proceeds from notes payable 54935 46691 8244 17.66% Repayment- mortgage payable (151) (141) -10 7.09% Dividends paid (694) (2085) 1391 -66.71% Deferred financing cost (1596) 0 -1596 Treasury stock purchased (59) (83) 24 -28.92% Stock options exercised 0 18 -18 -100.00% Tax benefit from stock options exercised 0 11 -11 -100.00% Net cash provided by financing activities 63895 44411 19484 43.87% Net increase in cash 3023 151 2872 1901.99% Effect of exchange rate (19) (23) 4 -17.39% Cash at beginning of the year 1270 1142 128 11.21% Cash at end of the year 4274 1270 3004 236.54% Evaluation of Company A and B: By taking accounting and financing ratios into account, we can observe clearly that company B is performing much better than company A. The state of liquidity is excellent in company B where the current ratio is 6.132 in the year 2010, and it increased in 2011. If we look at the quick acid test ratio, we can see that company A is holding greater stock at year end, and that is why it is experiencing a poor liquidity position and cash is locked up in closing stock. On the other hand, company B is in a far better position as compared with company A which has a current ratio of 1.22 in the year 2011, and it has diminished over time. The stock turnover of company B has doubled over the years as opposed to that of company A. Company A is utilizing its assets much more efficiently to generate sales as opposed to company B. This was evident from the fact that the total asset turnover of company B was 1.43 in 2011 and 1.908 of company A in 2011. Moreover, company B is also experiencing less risk in the form of a very low debt ratio which means it doesn’t finance its assets majorly through debt. Thus, company B has minimized its financial risk by not relying on external sources of finance to raise capital. This not only allows the company to reduce liabilities, but also to maintain control and increase profit since fewer or no financial charges might incur. The debt ratio of company A was 0.83 in 2011 as opposed to 0.1572 of company B in 2011. The gross profit margin in company B is higher than that of company A, which indicates higher profitability and higher earnings per share which prove to be an incentive to invest in the company. It is also important to note that despite a falling performance of company A from year 2010 to 2011 in terms of liquidity and profitability, the company has experienced an improvement in cash flow balances. The major reason for this is the increase in the proceeds from convertible debts and notes payable in the financing activities. * Bibliography Franklin James Plewa, G., 1995. Horizontal Analysis. In: Understanding Cash Flow. New York: John Wiley & Sons, Inc., pp. 214-216. Management, A. f., 2012. Vertical Analysis and Common Size Statements. [Online] Available at: http://www.accountingformanagement.com/vertical_analysis_full.htm [Accessed 2 May 2012]. Sciences, D. o. M., 2010. Analysis of Financial Statement. [Online] Available at: http://www.scribd.com/doc/53374070/9/Horizontal-Analysis-of-Cash-Flow-Statement [Accessed 1 May 2012]. Read More