Jet Task 1
Competition Bikes Incorporation
Financial and Operational Analysis
Competition Bikes Incorporation is a manufacturer of sports cycles and is a famous brand among professional cyclists. This report presents a financial and operational analysis for Competitors Bikes Incorporation for the past three financial years, which include year 6, 7 and 8. The financial analysis presented in this report includes horizontal and vertical analysis of the three years’ income statement and balance sheet of Competition Bikes Incorporation, trend analysis of sales including sales forecasting for the next three years and ratio analysis. In the ratio analysis of the company, comparative analysis has been conducted by keeping in view the ratios for Competitor Bikes Incorporation’s major competitor “Two Wheel Racing”. On the other hand, the operational analysis includes analysis of working capital of the company, evaluation of internal control of the company with respect to the purchasing department and its operations and evaluation of Competition Bikes Incorporation’s compliance with the requirements of Sarbanes Oxley Act. Each of these analysis and evaluations are presented in sequential manner in the following sections.
Horizontal Analysis of Competition Bikes Incorporation’s Financial Statements
Keeping in view the horizontal analysis for Competition Bikes Incorporation for the last three years, it is observed that the company has managed to increase its sales in 7th year in comparison with 6th year, i.e. from $ 4,485,000 in 6th year to $ 5,980,000 in 7th year, which represents an increase in sales by $ 1,495,000. At one hand, sales revenue for the company has increased considerably, but on the other hand cost of sales also increased significantly as there were increased units sold by the company. However, it can be noted that the increase in cost of sales for the company from 6th year to 7th year is lower than the increase in the sales revenue for the company. Apart from this, there is also a significant increase in the selling expenditures of the company, due to increase in advertisement expenses. In addition, due to increase in research and development activities of the company, the general and administrative expenses also increased in year 7. Lastly, it is also pertinent to note that the net income of the company increased by a significant percent in the year 7 due to comparatively lower percentage of the operating costs to gross profits and also due to decrease in the interest and tax expenditures. The horizontal analysis for year 8 shows contrasting findings as to the findings obtained for year 7. The sales revenue for the company declined in year 8 in comparison with the increase in year 7, and as a result there is a corresponding decline shown in cost of goods sold, gross profit and selling expenses for the company in year 8. However, the general and administrative expenses showed slight increase in year 8 (Brigham & Houston, 1998; Noreen, Brewer, & Garrison, 2011).
As far as balance sheet items are concerned, from year 6 to 7, the current assets increased from year 6 to year 7 by 31.5 %. Among this increase, the most significant increase was noted in the accounts receivables of the company, which can be attributed to increased sales volume. From year 7 to 8, the increase in current assets fell by 50 percent and as a result the increase remained to 16.5 %. However, it can be observed that the cash and cash equivalent increased significantly, i.e. by 348.2 % in year 8. On the other hand, non-current assets of the company, which include property and equipment, showed no increase at all in any item from year 6 to 7 and also from year 7 to 8, except from the accumulated depreciation. The rise in accumulated depreciation is due to the annual depreciation expense which is accumulated in the balance sheet of the company (Noreen, Brewer, & Garrison, 2011; Needles & Powers, 2010).
The liabilities and equity section of the balance sheet shows increase current liabilities of Competition Bike Incorporation by 122.4 % in year 7 as compared to year 6, primarily due to considerable increase in the accounts and notes payable, whereas the current liabilities increased in year 8 as compared to year 7 only by 28.5 %. The long term liabilities section has shown consistent decrease in the mortgage payables and other long term liabilities of the company. This trend has been similar in the past three years for the Competition Bike Incorporation. On the other hand, equity portion of the balance sheet shows no significant change in the comparative proportion of the items included therein, apart from the slight changes noted in the retained earnings of the company in year 8 and 7 (Jiambalvo, 2010; Noreen, Brewer, & Garrison, 2011; Arnold & Kumar, 2008).
Vertical Analysis of Competition Bikes Incorporation’s Financial Statements
In order to conduct a vertical analysis of financial statements, each item in the income statement is expressed as a percentage of net sales, and in case of balance sheet’s vertical analysis, each item pertaining to assets side of the balance sheet is expressed as a percentage of total assets and each item pertaining to equity and liabilities is