Life to Life Company Limited - Analysis of Liabilities, Assets, and Equity in the Balance Sheet - Example

Student’s name) (Course code+name) (Professor’s name) (University name) Table of Contents Table of Contents 2 1.0 Introduction 3 2.0 Assets 3 2.1 Analysis of noncurrent assets in the Life to Life ltd balance sheet 3 2.2 Analysis of current assets 5 2.3 Analysis of short term/current liabilities 8 2.4 Analysis of long term/ noncurrent liabilities 9 2.5 Analysis of change in equity 10 3.0 Other analysis 12 Analysis of liabilities, Assets and Equity in the Balance Sheet 1.0 Introduction The company under analysis is called Life to Life Company limited dealing in the telecommunication industry. The main aim of the company is to make easier the lives of people through communication gadgets. The balance sheet analysis is based on the financial year 2011 and 2012. The analysis will focus on the changes in the three major elements of the balances sheet. The changes in each and every item will be calculated and explanation given whether it’s good for the company or not. Balance sheet analysis can be said to be analysis of the component or elements of the balance sheet (Worthington and Higgs, 2004). In the balance Sheet, there are three major items which can be identified, these are; Assets Liabilities and Equity or capital If these three components of balance sheet are carefully analyzed, they can tell an investor a lot about the company. 2.0 Assets Assets can be defined as property which is owned by the company and has monetary value (Worthington and Higgs, 2004). In the Life to Life Company Ltd annual report, the balance sheet gives two types of assets i. None current assets ii. Current assets. 2.1 Analysis of noncurrent assets in the Life to Life ltd balance sheet i. Property, plants and equipment Property plants and equipments are immovable items or assets which are owned by the company. Percentage change = {(7590768-6903496)/6903496} X100 = 9.95542% There is increase in assets from the year 2011 to 2012. This shows that there are new purchases of assets. This increase is good for the company. The company should continue investing in the assets. ii. Information technology software These are IT related software’s like accounting, database and securities software’s Percentage change = {(330,734-371,667)/371,667} X 100 = -11.0134% This shows that there is decrease in assets due to depreciations which is an expense and is not good for the company. Recommendation: The Company should provide for provision iii. Telecommunication license fees This is the a statutory payment for any company operating in telecommunication industry Percentage change = {(81,778- 88,003)/88,003} X 100 = -7.07362% There is percentage decrease in telecommunication license fees. This is good for the company Recommendation: the company should have a long term or lease out license. iv. Indefeasible right issue These are right issues which cannot be annulled. Percentage change = {(199,658-164,282)/ 164,282} X100 = 21.533% There is increase in the indefeasible right issue. This is good for the company as it attract many investors Recommendation: the company should continue increasing indefeasible right issue v. Goodwill This is intangible asset related to the company reputation; Percentage change = {(549,050-549,050)/549,050} X100 = 0.00% There is no change in goodwill of the company This is good for the company Recommendation: The Company should maintain its current goodwill or increase it 2.2 Analysis of current assets i. Deferred fees These are fees which are not paid when due Percentage change = {(2749-604)/604} X100 = 355.1325% The increase is not good for the company Recommendation: the company should reduce the amount of deferred fees. ii. Inventories These are stock which are traded by the Company Percentage change in inventory = {(24,547-52262)/52,262} X 100 = -53.0309% This is not good for the company as its inventories has reduced meaning reduction in sales revenue. Recommendation: the company should act on increasing the company inventory iii. Account receivable These are debts which are collectable by the company Percentage change in account receivable = {(1,109,872- 881,600)/ 881,600} = 25.89292% the increase is not good for the Company as it shows that there is a lot of money held by other people yet should be in the company Recommendation: The Company should decrease the amount owed by other people iv. Other receivable These are un-categorized debts owed by other people Percentage in other receivable = {(334,146-275,494)/275,494} X 100 = 21.28976% This increase is not good for the company The company should reduce the increase in other receivable v. Due from other parties These are debts which are due from non trading partners Percentage change due from other parties = {(171,021-180,792)/180,792} X100 = -5.40455% The decrease is good for the company Recommendation: The Company should maintain the trend vi. Prepayments These are bills which are paid in advance Percentage change in prepayments = {(209,212 – 211,551)/211,551} X100 = -1.10564% This decrease is good for the company Recommendation: the company should use this money for other investment purposes instead of prepaying them vii. Cash and cash equivalents These are liquid cash which are owned by the company Percentage change in cash and cash equivalents = {(2,688,644-2,376,371)/2,376,371} X100 = 13.140751% This increase is not good as it shows that the company is having a lot of idle cash viii. Short term investments These are investments which there maturity period is less than one year Percentage change in short term investment = {(630,000-0)/0} X100 = 100% This increase is good for the Company as it shows diversification in investment The second part of the balance sheet is the liabilities. These are debts which the company owes other people. They are grouped into two, long term liabilities and short term liabilities. 2.3 Analysis of short term/current liabilities i. Accounts payable and accruals These are credits which the company owes other people Percentage change in accounts payable and accruals = {(3,954,965-3,426,184)/3,426,184} X100 = 15.433526% This increase is good for the Company Recommendation: the Company should increase this percentage as it can diversifies these income it holds ii. Due to related parties These are credits which are due to other traders in the business Percentage change in due to related parties = {(48,544-34,598)/34,598} X100 = 40.30869% The increase is good for the company Recommendation: the company should keep the percentage increase and should not reduces it iii. Current portion of long term borrowing This is part of the long term loan which the company is having Percentage in current portion of long term borrowing = {(328,613-192,952)/192,952} X100 = 70.30816% The increase is not good for the company Recommendation: the company should reduce external borrowing and concentrate in internal generation of income 2.4 Analysis of long term/ noncurrent liabilities i. Employees benefit These are retirement benefits which the company is owing its employees who are about to retire Percentage change in employee benefit = {(122,682-103,326)/103,326} X100 = 18.73294% This increase is good for the company Recommendation: The Company should invest this portion of income ii. Long term borrowing: These are loans which are repayable for a period more than one year (Bodie and Richard, 2008). Percentage change in long term borrowing = {(1,844,118-2,079,176)/2,079,176} X100 = -11.30534% This decrease is good for the Company as it shows the company is healthy and is able to pay back its credits Recommendation: the company should continue reducing the long term credits iii. Provisions Percentage change in provisions = {(95,638-0)/0} X100 = 100% This increase is good for the Company Recommendation: the company should continue increasing the provisions as Bodie and Richard, (2008) states that it will help in times of uncertainties The third element in the balance sheet is the equity is which the owners share is 2.5 Analysis of change in equity i. Share capital These are unit of ownership for the permanent shareholders who take decisions in company operations Percentage change in share capital = {(4,571,429-4,571,429)/4,571,429} X100 = 0.00% There is no change it is good for the company Recommendation: the Company should retained its original ownership ii. Share premium The ownership of the company for inactive shareholders who do not make decisions in the company Percentage in share premium = {(393,504 -393,504)/393,504} X100 = 0.00% There is no change. This is good for the company Recommendation: the company should continue maintaining its original ownership iii. Share based payment reserve Payments from reserves based on the amount of the share owned by individuals Percentage change in share based payment reserve = {(86,780-71,924)/71,924} X100 = 20.655136% Increase is good for the Company Recommendation: the company should increase this as it will attract many investors iv. Statutory reserves These are reserves which are statutory in nature and are required by law Percentage change in statutory reserves = {(465,581- 267,627)/267,627}*100 = 73.96638% Increase is not good for the company as it shows a lot of money tied by the government Recommendation: It should be reduced v. Proposed dividends These are dividends which are proposed to be paid to share holders Percentage change in proposed dividends = {(1,371,429-685,714)/685,714} X100 = 100% Increase is not good for the company Recommendation: it should be reduced vi. Retained earnings these are earnings which are not distributed out Percentage change in retained earnings = {(638,896- 228,738)/228,738} X100 = 179.31345% Increase is good for the company Recommendation: it should be increased further to increase capital base vii. Total shareholders’ equity Percentage change in shareholders’ equity = {(7,527,619- 6,218,936)/6,218,936} X100 = 21.043519% 3.0 Other analysis i. Inventory turnover This is given by cost of sales divided by average inventory Cost of goods sold = 2,994,133 Average stock = (closing stock + opening stock)/2 = (24,547+52,262)/2 = 38404.5 Inventory turnover = (2,994,133/38404.5) = 77.96308 times. This shows that the company is moving its merchandized very quickly which is healthy ii. Quick ratio Quick ratio = (current assets – inventory)/current liability = (5,170,191-24547)/838069 = 6.139881 this shows that the company has enough cash to cover its debt since the ratio is more than 1. So the company is healthy iii. Rate of turnover (ROA) ROA = net income/ assets = 1,979,541/9590057 = 0.206415979 This shows that the company rate of turnover is good. Conclusion From the analysis, the company is moving in the right direction and the financial management is on track. They need to adjust the cashflow of the company as there is a lot of cash which has been iddle within the company awaiting reinvestment. The stock turnover is encouraging but needs further adjustement as this will ensure further rtevenue flow. References Bodie, Werner and Richard T. (2008). “Financial Decision-Making in Markets and Firms: A Behavioral Perspective,” in Handbook OR & MS, Volume 9. R. Jarrow et al., eds. New York: Elsevier Science, Chapter 13. Worthington K and Higgs J. (2004). Advance accounting and financial ratios analysis. Homewood: Dow Jones- Irwin. Read More