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Question:
Assume that this is a Canadian Manufacturer of electronics equipment. 

Prepare a 2-page memo outlining what you found and providing recommendations.
Answer:
Introduction:

The project represents the horizontal and the vertical analysis of the financial statements of the company. This will help in gaining the insight of the company financials in order to make an informed decision related to the business.Further, the assignment contains the key recommendation in the form of memo based on the analysis. 

Vertical Analysis

Vertical analysis of the income statement

Vertical Analysis is generally used by the company for representing the relative size of the various accounts in the Final account statement of the company. Vertical analysis can also be defined as the proportional analysis of the year ending financial statements of the company (Caccioli, et. al., 2014). In the vertical analysis of the financial statement, every item in the income statement is represented in the percentage form for the net sales revenue generated by the company. Vertical analysis can be used in the company at the single point of time when the company wants to make the proportionate analysis of the account balances in the company.  

Vertical analysis of the Income Statement

 

2014

2015

2016

2017

2018

Sales

100.00%

100.00%

100.00%

100.00%

100.00%

COGS

61.79%

57.63%

58.03%

64.78%

65.67%

GP

38.21%

42.37%

41.97%

35.22%

34.33%

Operating Expenses:

 

 

 

 

 

Selling and Distribution

9.91%

10.09%

9.85%

7.68%

7.33%

Research &Development

4.37%

4.07%

4.22%

3.91%

5.75%

Administration

4.43%

7.49%

9.60%

8.21%

7.17%

Amortization

3.80%

2.26%

2.17%

2.37%

2.89%

Total OPEX

22.51%

23.90%

25.84%

22.16%

23.14%

 

 

 

 

 

 

Operating Income

15.70%

18.46%

16.13%

13.06%

11.19%

 

 

 

 

 

 

Interest

2.49%

2.69%

3.33%

2.28%

2.41%

 

 

 

 

 

 

Earnings Before Taxes

13.21%

15.78%

12.80%

10.78%

8.77%

 

 

 

 

 

 

Taxes

4.62%

5.52%

4.48%

3.77%

3.07%

 

 

 

 

 

 

Net Income

8.59%

10.25%

8.32%

7.01%

5.70%

 

Vertical Analysis of the Balance Sheet

Current Assets

2014

2015

2016

2017

2018

Cash

14.92%

18.02%

20.54%

16.42%

14.19%

Accounts Receivable

15.23%

17.30%

17.17%

15.97%

15.10%

Parts Inventory

12.18%

13.84%

13.73%

12.77%

12.06%

WIP Inventory

1.29%

1.03%

0.95%

0.91%

0.90%

Finished Goods Inventory

17.26%

21.89%

20.74%

19.30%

18.13%

Total Current Assets

60.89%

72.08%

73.14%

65.36%

60.39%

 

 

 

 

 

 

Fixed Assets (Net)

34.15%

18.53%

18.83%

27.41%

33.78%

Intangible Assets

4.97%

9.38%

8.03%

7.22%

5.83%

 

 

 

 

 

 

Total Assets

100.00%

100.00%

100.00%

100.00%

100.00%

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts Payable

20.30%

23.07%

18.66%

18.14%

15.71%

Current Portion of LT Debt

7.11%

7.78%

8.68%

7.83%

7.89%

Total Current Liabilities

27.41%

30.85%

27.34%

25.97%

23.60%

 

 

 

 

 

 

Long Term Debt

35.53%

38.91%

43.39%

39.17%

39.44%

 

 

 

 

 

 

Shareholders' Equity

37.06%

30.24%

29.27%

34.86%

36.96%

 

 

 

 

 

 

Total Liabilities & Equity

100.00%

100.00%

100.00%

100.00%

100.00%

Horizontal Analysis

Horizontal Analysis of the Income statement:

Horizontal Analysis of the income statement and the Balance sheet of the company is one of the major and the very crucial technique used by the company by the company can determine that the how the company is forming as compared to that of the last years or that from the company which is taken as the benchmark for the evaluation of the performance of the company.

In the horizontalanalysis, the comparison is made between the each of the items presented in the income statement and that of the balance sheet are basically to that from the past base year. 

Horizontal Analysis of the Income Statement

 

2014

2015

2016

2017

2018

Sales

100.00%

152.66%

304.72%

468.24%

537.75%

COGS

100.00%

135.66%

280.11%

495.70%

577.83%

GP

100.00%

180.15%

344.51%

423.84%

472.93%

Operating Expenses

 

 

 

 

 

Selling and Distribution

100.00%

157.12%

302.32%

340.11%

371.52%

Research & Development

100.00%

135.31%

290.50%

408.70%

739.14%

Administration

100.00%

326.66%

776.54%

952.02%

931.91%

Amortization

100.00%

50.42%

130.83%

254.01%

384.48%

Total OPEX

100.00%

168.27%

364.48%

459.40%

555.43%

 

 

 

 

 

 

Operating Income

100.00%

197.20%

315.87%

372.83%

354.58%

 

 

 

 

 

 

Interest

100.00%

173.11%

442.52%

421.47%

519.56%

 

 

 

 

 

 

Earnings Before Taxes

100.00%

201.73%

292.04%

363.67%

323.54%

 

 

 

 

 

 

Taxes

100.00%

201.73%

292.04%

363.68%

323.55%

 

 

 

 

 

 

Net Income

100.00%

201.73%

292.04%

363.67%

323.54%

Horizontal Analysis of the Balance Sheet:

Horizontal Analysis of Balance Sheet

Current Assets

2014

2015

2016

2017

2018

Cash

100%

154.46%

362.68%

339.92%

355.03%

Accounts Receivable

100%

139.45%

278.93%

319.13%

374.35%

Parts Inventory

100%

139.45%

278.93%

319.13%

373.76%

WIP Inventory

100%

69.30%

148.80%

182.35%

234.37%

Finished Goods Inventory

100%

167.21%

303.86%

346.83%

402.40%

Total Current Assets

100%

149.52%

303.77%

329.19%

374.49%

 

 

 

 

 

 

Fixed Assets (Net)

100%

14.38%

85.36%

220.95%

373.30%

Intangible Assets

100%

298.10%

443.34%

481.22%

461.33%

 

 

 

 

 

 

Total Assets

100%

110.76%

236.13%

299.78%

378.40%

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts Payable

100%

139.45%

208.91%

257.15%

270.16%

Current Portion of LT Debt

100%

130.80%

310.48%

340.67%

431.05%

Total Current Liabilities

100%

137.21%

235.24%

278.81%

311.88%

 

 

 

 

 

 

Long Term Debt

100%

130.80%

310.48%

340.67%

431.05%

 

 

 

 

 

 

Shareholders' Equity

100%

71.97%

165.49%

276.09%

377.13%

 

 

 

 

 

 

Total Liabilities & Equity

100%

110.76%

236.13%

299.78%

378.40%

 

 Memo Outlining:

Date: 28th Nov ’2018

To:

From:

Subject: Analysis of the financial statements using the Horizontal and the Vertical Analysis:

  • In the present case, it is clearly representing that the Gross profit of the companies was initially on the increasing trend in the in the relative years of 2014, 2015 and 2016 in proportion to sales revenue generated by the company (Del Negroand Sims, 2015). But in the year 2017 and in 2018 the percentage of the gross profits of the company is decreasing in comparison to that of past years. The reason for the decreasing gross profit percentage is the increase in the cost of goods sold expenses in these years.
  • Total operating expenses incurred by the company in the year 2014, 2015, 2016 were at a high percentage in relation to that of sales revenue generated by the company. But the operating expenses of the company in proportion to that of the sales revenue in the year 2017 and 2018 is comparatively less than that of the previous year.
  • The given table also presents the proportionate analysis of the operating income and the sales revenue generation of the company in the respective year (Drake and Fabozzi, 2012). Here it can be concluded that the operating income earned by the company in proportion to that of the net revenue generated by the company was relatively higher in the year 2014 to 2016 but the same has been decreased in proportionate to that of the sales revenue generated in the year 2017 and 2018.
  • Interest expenses are not relatively changing as the number of year changes. The interest expenses are on the same proportion for the past few years and neither much of the fluctuation is visible in the different years.
  • Earnings before the payment of the tax are in the decreasing trend to that of the total turnover achieved by the company (Wahlen, et. al., 2014). The reason can be expected that the operating and the nonoperating expenses of the company are increasing with the increasing production in the company.
  • The company is paying the taxes of the company on the same trend analysis with the minor fluctuation as in proportionate to that of the sales revenue generated by the company.
  • Overall it can be concluded that the net operating income earned by the company in proportionate to that of the sales made by the company is in the decreasing trend (Fligstein and Calder, 2015). The reason can be concluded that overall expenses of the company are increases with the inflation and the revenue generation process of the company is quite low to that of the meeting the expenses in the company. Vertical Analysis of the Balance Sheet for the few Years:
  • Vertical analysis of the Balance sheet represents the proportionate analysis of the each of the items of the company to be presented in proportionate to that of the total value of the assets with the company (Saerand Deman, 2012). The different items in the Balance sheet are reflected to be in proportionate to that of the total assets present in the balance sheet of the company. 
  • In the present case sales of the company is in the increasing trend as that from the comparison to that of the year 2014 which is taken as the base year for the calculation of the trend analysis in the company (Schönbohm, 2013).
  • Similarly, the costs of goods sold in the company are also increasing at the good rate as compared to that of the year 2014 taken as the base year for the calculation. The operating expenses of the company are also increasing as with every continuous year, the reason can be concluded as the increase in the operating and the other expenses of the company are also increasing as the company is operating on the large scale.
  • Overall the net profits of the company are increasing at the sufficient good rate, in if the conclusion is made on the overall performance of the company it can be concluded that the company is profitable in nature and it having the long future ahead (Shahzad and Ali, 2012).
  • Horizontal analysis of the balance sheet of the company is representing the proportionate relationship between the past years which is taken as the base for the calculation of the trend analysis of the company in the current year to that of the past year.
  • Here in the present question, the view is made that the total assets of the company are increasing at the considerably in the good proportion to that of the year 2014 which is taken as the base for evaluation of the performance of the company in the other forwarding year.
  • The company has increased its working with the acquisition of the assets of the company and the day to day operation of the company by the funds generated by the company on loan (Sinha, 2012). That is concluded on the basis of the increasing trend of the long-term liabilities of the company with the every succeeding year.
  • The company is increased the working operation in the company this is reflected with the increasing trend of the equity share capital of the company with the every succeeding year. 
Conclusion:

The report concludes about the reason for the trend analysis of the company by the horizontal and the vertical analysis of the financial statements of the company. 

References:

Caccioli, F., Shrestha, M., Moore, C. and Farmer, J.D., 2014.Stability analysis of financial contagion due to overlapping portfolios. Journal of Banking & Finance, 46, pp.233-245.

Del Negro, M. and Sims, C.A., 2015. When does a central bank? s balance sheet require fiscal support?. Journal of Monetary Economics, 73, pp.1-19.

Drake, P.P. and Fabozzi, F.J., 2012. Financial ratio analysis. Encyclopedia of Financial Models.

Fligstein, N. and Calder, R., 2015. Architecture of markets. Emerging Trends in the Social and Behavioral Sciences: An Interdisciplinary, Searchable, and Linkable Resource, pp.1-14.

Saer, I.M. andDeman, N., 2012. Financial ratios as an evaluation instrument of business quality in small and medium-sized enterprises. International Journal of Management Cases, 14(4), pp.373-385.

Schönbohm, A., 2013. Performance measurement and management with financial ratios: the BASF SE case (No. 72). Working Papers of the Institute of Management Berlin at the Berlin School of Economics and Law (HWR Berlin).

Shahzad, A. and Ali, R., 2012. Approximate analytic solution for magneto-hydrodynamic flow of a non-Newtonian fluid over a vertical stretching sheet. Can J ApplSci, 2(1), pp.202-215.

Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation.Nelson Education.

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