T-accounts, the Balance Sheet and Profit and Loss Account for a small US company

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Table of Contents

Question 1

Vertical analysis of the profit and loss account 2013

HORIZONTAL ANALYSIS OF THE PROFIT AND LOSS ACCOUNT

VERTICAL ANALYSIS OF THE BALANCE SHEET 2013

HORIZONTAL ANALYSIS OF THE BALANCE SHEET

Question 2

Cash flow Statement

Question 3

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Question 4

T-accounts, the Balance Sheet and Profit and Loss Account for a small US company

Question 1

The vertical analysis of the company’s statements depicts the relationship among items of one financial statement and measured as a percentage. On the balance sheet, each item on the asset column is depicted as a percentage of the total assets whilst the items on the liability column are shown to be a percentage of the total liability. On the other hand, each item present on the profit and loss statements is represented as a percentage of net sales.

Vertical analysis of the profit and loss account 2013

Net sales = ""= 100%

Cost of goods sold = "" × 100 = 65.57%

Gross profit = ""× 100 = 34.42%

Selling, general and administrative expenses = ""

Royalty income, net = "" "" 0.10%

Amortization of intangible property = "" 0.09%

Impairment of good will = 0

Impairment of intangible property (except goodwill) = 0

Income (loss) from operations = ""1.02%

Interest income = 0

Interest expense = "" ""= 0.62%

Income tax expense = "" 0.46%

Net income (loss) = "" "" = 0.096%

Net loss attributed to non-controlling interest = "" ""0.04%

Net income (loss) attributable to company = "" ""0.057%

HORIZONTAL ANALYSIS OF THE PROFIT AND LOSS ACCOUNT

This analysis provides you with a comparison of figures from one period to the next with the use of profit and loss accounts from at least two periods. Each item has two entries both in current period and prior period so as to compare and determine the percentage change of the two periods. These changes are also referred to as trends and enable analysts see differences from one period to the next.

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20132012 %Change

Net sales75,266,03883,523,330 (-) 9.89%

Cost of goods sold49,353,74651,970,244 (-) 5.03%

Gross profit25,912,29231,553,086 (-) 17.9%

Selling, general and administrative expenses 24,996,44027,300,248 (-) 8.44%

Royalty income, net78,998-299,174 126.4%

Amortization of intangible properties 69,733134,201 (-) 48.03%

Income (loss) from operations767,1214,417,811 (-) 82.64%

Interest expense-466,601-558,661 16.5%

Income tax expense347,7881,257,335 (-) 72.33%

Net income (loss)-72,4782,626,200 (-) 102.8%

Net loss attributed to non-controlling interest -29,641-123,117 75.92%

Net income (loss) attributable to company -42,8372,749,317 101.6%

VERTICAL ANALYSIS OF THE BALANCE SHEET 2013

Cash = "" = 1.65%

Trade financial statement, net of payment for doubtful accounts = "" ""= 21.91%

Other receivables = "" "" = 0.49%

Income levies refundable = "" "" 1.3%

Inventories = "" "" = 40.2%

Prepaid expenditures and other resources = "" ""= 72.9%

Deferred income taxes-current = "" ""= 3.8%

Total existing assets = "" ""= 70.0%

Assets and equipment, net = "" ""= 28.24%

Goodwill = 0

Note receivable = 0

Intangible property, net = "" ""= 0.75%

Overdue revenue taxes noncurrent = "" ""= 0.35%

Other properties, net = ""

Liabilities

Current instalments of long term debt = ""= 0.57%

Accounts payable and accumulated expenditures = ""= 7.2%

Accumulated payment and payroll levies = ""= 2.8%

Income taxes payable = ""= 0

Total current liability = ""= 10.6%

Note billed to bank = ""= 5.5%

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Long term liability, exclusive of current repayments = ""= 16.51%

Other noncurrent dues (liabilities) = ""= 2.3%

Total liabilities = ""= 34.9%

Preferred stock, no par value, accredited 1 Million shares; none delivered and due = 0

Mutual stocks, no par value, accredited 50 Million shares; allotted and outstanding 6,411,592 shares in 2012 and 6,287,761 in 2011

= "" = 19.11%

Retained earnings = "" = 47.4%

Total shareholders’ equity allocation extent to company = "" = 66.5%

Non-controlling interest = "" = 1.41%

Total shareholders’ equity contingencies and commitments = "" = 65.1%

HORIZONTAL ANALYSIS OF THE BALANCE SHEET

Item

2013

2012

Change

%Change

Cash

750,303

591,038

159,265

26.9%

Trade financial statement receivables, net of payment for doubtful accounts

9,951,970

12,601,402

2,649,432

(-) 21.0%

Other receivables

225,016

216,212

8,804

4.1%

Revenue levies refundable

590,569

118,058

472,511

(-) 400.2%

Inventories

18,234,279

18,464,019

229,740

(-) 1.24%

Prepaid expenditures and other resource (assets)

331,141

484,406

153,265

(-) 31.6

Deferred income taxes-current

1,726,695

2,289,530

562,835

(-) 24.6%

Total current (existing) assets

31,809,973

34,764,665

2,954,692

(-) 8.5%

Assets and equipment, net

12,827,198

11,648,166

1,179,032

10.12

Goodwill

0

0

0

0

Note receivable

0

0

0

0

Intangible property, net

340,807

245,956

94,851

38.6%

Delayed revenue noncurrent

161,063

513,817

352,754

68.7%

Other properties, net

275,858

589,741

313,883

53.22%

Total Assets

45,414,899

47,762,345

2,347,446

(-) 4.91%

Current instalments of long term debt

258,628

247,739

10,889

4.39%

Accounts due and accumulated expenditures

3,267,812

4,191,633

923,821

(-) 22%

Accumulated payment and payroll levies

1,297,591

3,464,452

2,166,861

62.55%

Income taxes payable

0

22,937

22,937

100%

Total current liability

4,824,031

7,926,761

3,102,730

39.14%

Note billed to bank

2,500,000

1,000,000

1,500,000

150%

Long term liability, exclusive of existing repayments

7,497,042

7,755,680

258,638

(-) 3.33%

Other noncurrent obligations

1,034,110

1,044,862

10,752

(-) 1.03%

Total liabilities

15,855,183

17,727,303

1,872,120

10.6%

Preferred stock, no par value, accredited 1 million shares; none distributed and due

0

0

0

0

Shared stock, no par value, accredited 50 Million shares; delivered and owing 6,287,761 in 2011 and 6,411,592 shares in 2012

8,679,435

8,024,544

654,891

8.2%

Retained earnings

21,519,238

22,619,814

1,100,576

(-) 4.9%

Total shareholders’ equity allocation to business

30,198,673

30,644,358

445,685

(-) 1.5%

Non-controlling interest

-638,957

-609,316

29,641

4.86%

Total shareholders’ equity Guarantees and emergencies

29,559,716

47,762,345

18,202,629

(-) 38.11%

Question 2

Cash flow Statement

The cash flow statement includes the following items;

  • Net cash from operating activities
  • Net cash used in investing activities
  • Net cash used in financing activities
  • Net increase in cash and cash equivalents
  • Cash and cash equivalents from the beginning of the period
  • Cash and cash equivalents at the end of the period

Cash flow from operating activities in 2013;

= (EBT + Depreciation + Interest expenses) – (Inventory change) + decrease in trade receivables + Increase in trade payables – (Interest paid + taxation paid + Dividends paid)

Cash flow from operating activities = (275,310 + 21,726,591 + 466,601) – (229,740) + 2,649,432 + 923,821 – (466,601 + 347,788 + 694,354.80)

Cash flow from operating activities = $(21,601,740 – 1,508,743.80 = $21,653,839.20 (2013)

Cash flow from operating activities = $15,838,986 (2012)

"" Net cash from investing activities = payments to acquire tangible non-current assets + interest received = $340,807 + 0 = $340,807

Cash flows from financing activities = repayments of loan notes + issue of ordinary shares = 2,500,000 + 8,679,435 = $11,179,435

Cash flow at the start of the period = $9,254,368.20

Cash flow at the end of the period = $750,303

Cash flow Statement units in US $

ITEM

2013

2012

Cash flow from operating activities

20,092,996.20

15,838,986

Cash flow from investing activities

340,807

254,372

Cash flows used for financing activities

(-) 11,179,435

(-) 9,024,544

Cash flow at the start of the period

9,254,368.20

23,221,566.48

Cash flow at the end of the period

750,303

591,038

Total cash flows

10,004,671.20

22,630,528.50

Question 3

The Du Pont analysis for the extended evaluation of this company would be for the purpose of the return and equity determination. This therefore purports that a company can earn a high return on equity if;

  • If the earnings of the net profit margins are high
  • The utilization of the assets and inventory are effective so as to generate increases in sales
  • The financial leverage of the company is high

Conferring to analysis the return on equity is therefore;

Return on equity = "" ""

Net Income (loss) = $72,478

Sales = 75,266,038

Total Assets = $45,414,899

Total equity = $29,559,716

Therefore, return on equity = "" "" "" "" ""

The company’s ROE = (0.000963 "" 1.6573"") ""

Return on Equity = 0.002452 ""

Return on equity = - 0.25%

This analysis provides a comprehensive perspective of the company’s return on its equity. This shows the position of strength within its profit making activities and those areas that require enhancement are also highlighted. For a deeper insight to the company’s health the Du Pont equation could be extended further thus providing a five factor analysis which is more revealing.

The return on equity = ""

The ROE = EBIT Margin ""

Therefore, ROE = "" "" "" "" "" "" ""

The return on equity = - 0.25%

Net Profit Margin = "" = (0.000963) ""

Asset Turnover = "" = 1.6573 = 1.7

Financial leverage = "" = 1.5346 = 1.5

Question 4

The company is particularly on a negative trend as indicated by the horizontal analysis or trend analysis since there is a representation of decrease in sales, income, and the gross profit. The vertical analysis depicts a company incurring massive expense such as the prepaid expenses that are a 72.9% and the total liabilities at 34.9%. The financial health of the company in the year 2013 is worrying since the performance shown by the return on equity is negative thus indication a reduction on the utilization of resources available.

The company’s net profit margin is at 0.096% which has a reflection on the efficiency level of the company in attaining full potential. The asset turnover at 1.7 means that the company managed to overhaul its inventory about 1.7 times indication poor turnover compared to the previous years. The financial leverage o the company at 1.5 allows the company to borrow only up to 1.5 times its financial worth. This is not appropriate for a company that requires financial muscle to be able to diversify its investments reduce it overhead costs and seek profitability and during the financial year ending October 2013 there has been a reduced cash flow. Therefore, the company in question has incurred massive losses due to the costs of servicing loans and long term investing activities that haven’t matured yet.