Accounting Statement Analysis - Essay Example

Accounting ment Analysis GROUP ASSIGNMENT Table of contents Part Vertical Analysis Income ment analysis Net income Individual Income Statement Items Balance sheet Part 2: Ratio Analysis Liquidity ratios Long Term Debt Paying Ability Profitability Part 3: Ratio Analysis Conclusions Liquidity Profitability Long-term debt paying ability Long-term debt Cash flows Part 1: Vertical Analysis Income statement analysis Net income 1. Description of the trend in Net Income: Net Income shows an increasing trend between 11 12 from 8.28% to 11.26. Subsequently there is a decrease in trend in 13 14, from 11.26 in 2012 to 10.59 in 2013 and 9% in 2014. 2. Reasons for the trend in Net Income: Net Income between ’11 and ’12 has increased mainly because of increase in other revenue and a decrease in COGS. Decrease in between 12 13 and 13 14 are due to decrease in other operational income (Warren et al., 2012). Individual Income Statement Items 1. Description of the trend in Cost of Goods Sold: The trend over the ’11 to’12 and 12 to 13 has slightly decreased from 59.39% to 58.02% and from 58.02% to 57.96%. The trend over period 13-14 was a slight increase from 57.96% to 59.57% 2. Reasons for the trend in Cost of Goods Sold: In the period between 11 to 12 and 12 13 purchase price of stock was low positively affecting COGS. Increasing trend over the period 13 to 14 in COGS was due to increase in purchasing price of stock(Gilbertson & Lehman, 2013). Operating expenses 1. Description of trend in operation expense Operating expense shows a decreasing trend in between 11-12, from 28.73% to 28.22%, 12-13, from 28.22% to 27.87% and 13-14 from 27.87 to 25.78%. 2. Reasons for the trend in operation expense Operating expense has a decreasing trend in all the periods 11-12, 12-13 13-14 because of increase in the levels of operation e.g. units purchased, sales thus scale of economy leading to decrease in operating expense (Gilbertson & Lehman, 2013). Interest Expenses 1. Description of trend in interest expense Interest expense shows a decreasing trend in between the periods 11-12 from 0.71% to 0.49%, 12-13 from 0.49% to 0.35%. It showed an increase in period 13-14 from 0.35% to 0.36% 2. Reason for trend in interest expense In the period 11 between 12, the decrease in trend was due to decrease in differed liability. Decrease in the period 12 between 13 was due to utilization of reserves to finance the company’s operations. During the period from 13 between 14, there was increase due to increase in long-term loan by a very big margin. Other income 1. Trend in other income or (expense) Other incomes have a positive deviation from -2.40% to -1.76% in between the period 2011 and 2014. 2. Reason for the trend in other income or (expense) The positive deviation is due to proportionate increase in other income and proportionate decrease on other expenses resulting to a positive deviation. Taxes Related to Operations 1. Trend in Taxes Related to Operations Taxes related to operations have a positive deviation in between the period 2011 and 2014 from 3.09% to 3.82%. 2. Reason for the trend in Taxes Related to Operations Increase in Taxes Related to Operations is due to propionate increase in other incomes, operation income and decrease in interest expenses. Balance sheet 1. Description of the trend in Total Current assets: Total Current Assets have increased from 64.2% to 73.56% as a proportion of Total Assets between 2011 and 2014. Now do the same for all the other sub totals mentioned above. 2. Reasons for the trend in Total Current Assets: Total Current Assets has have increased as proportion to total assets due to increase in cash and inventories. This has been partly offset by decrease in gross receivables and other assets 1. Description of trend in long term assets Total long-term assets have decreased from 35.8% to 26.44% as proportion to total asset for the periods 11- 14 2. Reasons for trend in long term assets Long-term assets have decreased due to decrease in intangible assets and other non-operating assets in proportion to total assets. Total current liabilities 1. Description of trend in current liabilities Total current liabilities have decreased from 30.79% to 29.12% in the period 2011-2014 in proportion to total liabilities and equity. 2. Reasons for trend in current liabilities Decrease in current liabilities is due to decrease in other current liabilities partly offset increase in accounts receivables. Total long-term liabilities 1. Description of trend in long term liabilities Long-term liabilities have increased from 6.04% to 7.53% in the period 2011-2014 in proportion to total liabilities and equity. 2. Reason for trend in long term liabilities Positive deviation on long-term liability is due to propionate increase on long term debt partly offset by decrease on reserves Total equity 1. Description of trend in total equity Total equity has slightly increased from 63.16% to 63.36% in the period 2011-2014 in proportion to total liabilities and equity. 2. Reason for trend in total equity Total equity has increased due to proportionate increase in net profits. Part 2: Ratio Analysis Liquidity ratios : A/R Turnover in Days; There is No change in average turnover days for the period between 2011 and 2014. This is due to lack of information on data of 2011. Inventory Turnover in Days There is No change in inventory turnover days for the period between 2011 and 2014. This is due to lack of information on data of 2011 Operating Cycle There is No change in operating cycle for the period between 2011 and 2014. This is due to lack of information on data of 2011 Current Ratio Current ratio has improved from 2.08 to 2.53 for the period between 2011 and 2014. These indicate an improved ability to settle current obligation. Acid Test Ratio Acid test ratio has improved from 1.26 to 1.54 for the period between 2011 and 2014. This indicates that the firm can pay its current liability faster with only quick assets. Cash Ratio Cash ratio has improved from 0.37 to 0.72 for the period between 2011 and 2014 This indicates an improved ability of the firm to pay for its current liabilities with only cash and cash equivalent. Long Term Debt Paying Ability Times Interest Earned Time interest earned has a positive deviation from 17.12 to 36.78 for the period between 2011 and 2014. This trend indicates that the firm has increased its proportionate amount available to cover interest in future. Debt/Equity Debt/equity has declined from 58.32% to 57.84% for the period between 2011 and 2014. This trend indicates that the proportion of long-term debt in the firm has reduced proportionately in comparison to equity (Brigham & Ehrhardt, 2010). Cash Flow/Total Debt Cash flow/ total debt has a negative deviation from 52.47% to 41.51% for the period between 2011 and 2014 This trend indicates that the company’s ability to cover total debt with cash flow from operations has reduced. Profitability Net Profit Margin Net profit margin has a positive deviation from 8.27% to 9.03% for the period between 2011 and 2014 This trend indicates that the firm’s profitability margin in relation to sales has improved. The firm has therefore improved its cost control methods(Brigham & Ehrhardt, 2010). Return on Assets There is No change return on assets for the period between 2011 and 2014. This is due to lack of information on data of 2011. Sales to Fixed Assets There is No change in sales to fixed assets for the period between 2011 and 2014. This is due to lack of information on data of 2011. Return on Investment There is No change in return on investment for the period between 2011 and 2014. This is due to lack of information on data of 201. Return on Common Equity There is No change in return on common stock for the period between 2011 and 2014. This is due to lack of information on data of 2011. Gross Profit Margin Gross margin profit has a negativedeviation from 40.61% to 40.43% for the period between 2011and 2014. This negative trend indicates that cost of goods sold is gradually increasing proportionately to sales. This may be due to increase in purchase price or carriage on stack. It can also be because of decrease in selling price(Brigham & Ehrhardt, 2010). Investor Analysis Degree of Financial Leverage Degree of financial leverage has a negative deviation from 1.06 to 1.03 for the period between 2011 and 2014. This indicates that the firm’s cash flow available to owners of the firm is becoming more sensitive to changes in operating income(Graham et al., 2012). Dividend Payout Dividend payout has a positive deviation from 65.47% to 72.04% for the period between 2011 and 2014. Positive deviation in dividend payout indicates that the firm is paying more to its shareholders inform of dividend. This also indicates that the firm’s growth rate is adversely affected(Brigham & Ehrhardt, 2010). Operation Cash Flow per Share Operation Cash Flow per Share has improved from 0.36 to 0.39 for the period between 2011 and 2014 This trend in Operation Cash Flow per Share indicates that cash flow attributed to each share of common stock has improved(Graham et al., 2012). Part 3: Ratio Analysis Conclusions Liquidity Improving trend in day’s sales in receivables, day’s sales in inventory, current ratio and cash ratio indicates improvement in liquidity position of the firm. Profitability Net profit margin has a positive trend however, the firms overall profitability has a slightly negative trend because net profit margin and operational incomes positive trend has been fully offset by negative trend in other profitability ratios like gross profit margin (Graham et al., 2012). Long-term debt paying ability Long-term debt paying ability of the firm is negatively affected by decreasing trend in the following ratios; decrease in debt to equity ratio, decrease in debt to tangible assets, and further decrease in cash flow/ total debt ratio. This has been partly offset by increase in time interest earnings fixed charge coverage(Graham et al., 2012). Cash flows Operation Cash Flow per Share has improved from 0.36 to 0.39 for the period between 2011 and 2014 This trend in Operation Cash Flow per Share indicates that cash flow attributed to each share of common stock has improved. However, the overall cash flow of the firm is declining due to payment of dividend that has increased as indicated by operation cash flow/ cash dividend from 2.51 to 1.51 leading to negative trend in cash flow for the period between 2011 and 2014(Graham et al., 2012). All of these ratios are in decline. The cash ratio has declined from 0.59 to 0.37. The Cash Flow/Total Debt Ratio has declined enormously from 18.45% to 1.98% indicating likely difficulties in the generation sufficient operating cash flow to meet long-term debt commitments. Both the Operating Cash Flow per Share and the Operation Cash Flow/Cash Dividends declined significantly. Brigham, E. F., & Ehrhardt References Brigham, E. F., & Ehrhardt, M. C. (2010). Financial management: Theory and practice. Mason, Ohio: South-Western. Top of Form Gilbertson, C. B., & Lehman, M. W. (2013). Century 21 accounting. Mason, Ohio: South-Western. Graham, J. R., Smart, S. B., & Megginson, W. L. (2012). Introduction to corporate finance. Australia: South-Western/Cengage Learning.Bottom of Form Warren, C. S., Reeve, J. M., & Duchac, J. (2012). Financial accounting. Mason, OH: South-Western Cengage Learning. Read More