$ (6,750.00) Answer the following based on the above information: Horizontal ana
ID: 2481190 • Letter: #
Question
$ (6,750.00)
Answer the following based on the above information:
Horizontal analysis:
Income Statement: What trends do you see? What is happening with sales, and cost of goods sold? What about operating costs? Are they maintaining adequate control?
Balance Sheet: What has happened to cash? Can you tell where the cash has gone? What about property, plant and equipment? What is happening there? Any clues to what is going on with the companies? Take a look at liabilities and tell me the same thing, any ideas as to what is going on?
Ratios: Do the following ratios, and tell me what they mean.
Return on sales, what does the result mean?
Earnings per share: Again what does that mean for the shareholders?
Ratio of stockholders equity to total equity: Is it better to have lots of equity, or liabilities? Please tell me the situation with each company, and tell me which is better and why.
Current ration: What does the result mean? What does it mean for each company?
Acid test ratio: how is this different from the current ratio, and which would you use? Tell me the result of both companies, and what they mean.
Inventory turnover: what does this mean? Calculate for each company, and interpret what it means for each.
Accounts receivable turnover: what does this mean? Calculate for each company, and interpret what it means for each.
Company A Balance Sheet Company B Balance sheet 2015 2014 2015 2014 Cash $ 69,500 $ 94,800 $ 40,500.00 $ 25,300.00 Accounts Receivable $ 22,100 $ 19,900 $ 4,200.00 $ 20,300.00 Marketable Securities $ 500 $ 500 $ - $ 7,000.00 Inventory $ 19,900 $ 17,000 $ 2,000.00 $ 11,300.00 Prepaid Expenses $ 800 $ 700 $ - $ 800.00 Supplies $ 300 $ 300 $ 300.00 $ 700.00 Total Current Assets $ 115,115 $ 135,214 $ 49,015.00 $ 67,414.00 Property Plant and Equipment $ 140,000 $ 80,000 $ 6,000.00 $ 55,000.00 Land $ 80,000 $ 50,000 $ 3,000.00 $ 25,000.00 Accumulated Depreciation $ 18,000 $ 16,500 $ 2,000.00 $ 51,000.00 Office Equipment $ 500 $ 500 $ 150.00 $ 600.00 Accumulated Depreciation $ 100 $ 50 $ 50.00 $ 300.00 Total Assets $ 315,500 $ 247,150 $ 54,100 $ 94,700 Accounts Payable 68800 48000 $ 45,200.00 $ 65,000.00 Interest Payable 550 400 $ 150.00 $ 800.00 Mortgage payable 7000 4000 $ 300.00 $ 5,000.00 Total Liabilities 76350 52400 $ 45,650.00 $ 70,800.00 Stockholders Equity Common Stock 32000 32000 $ 300.00 $ 9,000.00 Paid in capital 700 700 $ 900.00 $ 900.00 Retained earnings 206450 162050 $ 7,250.00 $ 14,000.00 Company A Income Statement Company B Income Statements Revenue Sales $ 1,115,500.00 $ 955,000.00 $ 250,000.00 $ 775,000.00 Cost of goods sold $ 560,000.00 $ 515,000.00 $ 162,500.00 $ 475,000.00 Sales Commissions $ 36,000.00 $ 28,600.00 $ 7,500.00 $ 14,250.00 Salaries $ 355,500.00 $ 335,500.00 $ 85,000.00 $ 250,000.00 Advertising $ 15,000.00 $ 11,000.00 $ - $ 15,000.00 Travel Expense $ 5,000.00 $ 5,000.00 $ - $ 7,000.00 Insurance expense $ 5,000.00 $ 4,500.00 $ 3,000.00 $ 5,000.00 Mortage expense $ 15,000.00 $ 8,000.00 $ 1,500.00 $ 7,500.00 Interest Expense $ 6,000.00 $ 3,000.00 $ 3,000.00 $ 8,000.00 Net Income $ 118,000.00 $ 44,400.00 $ (12,500.00)$ (6,750.00)
Explanation / Answer
Income statement: It shows net income by deducting total cost from total sales. Increasing net income indicates profit-making company, which is good and attracted to investors.
Net income of company-A increases from $44,400 to $118,000. This is more than 2.5 times increase between 2014 and 2015.
Net incomes of company-B are in brackets. Therefore, these are losses, since total costs are higher than total sales. In 2014 the net income is ($6,750) and it is increased further to ($12,500) in 2015. The loss increases almost (12,500/6,750 =) 1.85 times in 2015 than 2014. This is a sick company and investing in company might be riskier, since the company may not pay its dues.
Sales and cost of goods sold: Both are increasing in company –A. But sale increases more than cost of goods sold. Increase in sale is $160,500 and cost of goods sold is $45,000. It happens because of the theory of “economies of scale”. It means increasing production for sale reduces the cost of production. Company-A gets the advantage of higher production.
The sale of company-B is decreasing by (775,000 – 250,000 =) $525,000, whereas decrease in cost is only $312,500. The company has “diseconomies of scale”, since the lower production has increasing cost burden.
Operating expenses like commission, salaries, etc. are almost fixed between the years in company-A. This is good, since it shows better control. In case of company-B, operating costs reduce because of decreasing sales. But such reductions are not proportionate, which increases cost burden and loss.
Control: Company-A has much better control on total operation than company-B
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