Case Study Analysis of Trend Ltd.: Financial Performance, Health, and Cash Flow Management
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This project report analyzes the financial statements of Trend Ltd., including areas of concern in financial performance, financial health, and cash flow management. It also assesses the concerns raised by Priya and Sally.
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Table of Contents INTRODUCTION...........................................................................................................................3 PART 1............................................................................................................................................3 1. Explain general purpose of three financial statements:...........................................................3 2. Analyze the financial statements prepared by Trend Ltd........................................................5 i. Areas of concern in financial performance...........................................................................5 ii. Areas of concern in financial health....................................................................................6 iii. Areas of concern in cash flow management.......................................................................6 3. Assess the concerns raised by Priya and Sally........................................................................6 REFERENCES................................................................................................................................8
INTRODUCTION This project report is based on case study analysis of Trend Ltd., it will cover general purpose of financial statements and usefulness of each statements from the context of manager and internal stakeholders. This part of project also analyses financial statements of Trend Ltd based on its financial performance, financial health and cash flow management. PART 1 1. Explain general purpose of three financial statements: Income statement: All publicly traded companies are required to issue income statements quarterly or annually. There are three major items that complete the structure of the income statement - revenue, expenditure and net profit. It refers to the performance of the company over a particular period of time. In other words, it is a profit and loss account of the company. An income statement consists of two sections - the operating section and the non-operating section. The operating section deals with the day-to-day business activities of the company, while the non-operating section records all revenues and expenses that are not related to the company's regular business activities. Purpose of Income statement: 1.Primarily, income statements are prepared for the purpose of assessing a company's financial performanceover a particularperiod. Theperformance can be submittedquarterlyor annually. Various stakeholders are interested in knowing how well the company is doing. 2.Through the income statement, the reader is able to understand how profitable the business is and what business activities the company has undertaken. We are also able to determine the amount of profit or loss that was generated during a particular period. If one were to keep income statements together for several consecutive years, a trend analysis can also be done to determine changes in revenue and expenditure items over time.
3.An income statement is used to meet the needs of different types of users. First, we discuss the utility of the income statement for external users. The income statement is available quarterly and annually, as noted above. 4.Potential investors will want to assess the company's performance to determine if it is worth investing their money in the company. If the income statement shows that the company is not profitable, then investors will not invest their money in such an enterprise (Robinson, 2020). Uses: It can be used by Trend Ltd. to calculate profit earned during a year and classified between expenses occurred directly or indirectly. Balance sheet A balance sheet is a statement that depicts the financial position of a business. It is called because it is a sheet of all account balances related to assets and liabilities for a certain period of time. Its purpose is to get into the true financial position of a business for a specified time, i.e., solvency or bankruptcy. The test balance sheet, trading and profit and loss accounts are closed after preparation of all general accounts. The balance will show in the ledger and in the real accounts.Thebalancesheetpreparedthusshowsthebalanceoftheclassifiedlist (Subramanyam, 2009). Purpose of balance sheet: The purpose behind the activity report is to find out the financial position of a company at a given point of time. News shows the quantity of an item (resources) and its amount (liabilities), just as the amount of resources has contributed to the business (value). This data gradually becomes important when accounting reports are collected for certain back periods, aiming to be able to see the model in certain detail. Uses: It is being used by Trend Ltd. to know financial position of the company; additional to this it also helps in knowing the financial position of the firm (Fridson and Alvarez, 2011). Cash flow statement Also known as cash control, you should include charts of accounts, records of releases, accounts payable, accounts receivable, charts and reports. Throughout the post we will see how to build
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your cash flow in practice, but before that, let's understand its main concept. It sounds simple, but thinks about the scenario that most companies usually face. Most accounts mature on day 5 of each month, while sales are made throughout the month. Cash is a clear match (Foster, 1986). Purpose of cash flow statement: The purpose of preparing a cash flow statement is to look at the source of cash and usage of cash of the company during a specified time period. Cash flow statements are traditionally considered less important than income statements and balance sheets, but can be used to understand a company's performance trends that cannot be understood through the other two financial statements. While the statement of cash flows is considered the third most important of the three financial statements, investors find the statement of cash flow to be the most transparent, so they rely more on it than other financial statements to make investment decisions. The statement of cash flow is divided into three categories: cash flow from operating activities, cash flow from investment activities and cash flow from financial activities. Operating activities include revenue generating activities of the company. Examples of operating activities include sales of products or services as well as paid operating expenses such as salaries, wages, rent and transportation such as cash (Penman, 2013). Investment activities include payments made to purchase long-term assets, cash received from the sale of long-term assets. Examples of investment activities are the purchase or sale of a fixed asset or asset, plant and equipment, and those issued by another entity. Purchase or sale of security carried. Uses: It is used by Trend Ltd. to know liquidity of the business and to determine where the cash has been utilized. 2. Analyze the financial statements prepared by Trend Ltd i. Areas of concern in financial performance As compared to previous year’s sales revenue which is 2018; current year performance is down by 1,700k pounds. Where cost of goods sold has been increased by 231K pounds, which again indicates failure of company to manage variable costs with sales revenue or it can be said that variable cost of the company has been increased. Due to less revenue and more costs as
compared to 2018; Trend Ltd’s gross profit and net profit is decreased and underperformed by the company during the year. ii. Areas of concern in financial health Despite Trends Ltd. has underperformed in context of net earnings during the year but its financial health become strong compared to previous year. Trend’s total assets have been increased from 2,447k pounds to 3,107k pounds which shows approx. 27% increment in noncurrent assets from 2018. On the other hand; company’s total current assets have also been increased by 17% and current liabilities by 30%; this indicates that current ratio of company is reduced in 2019. This could indication of increasing in the risk of default by company. All over, financial health of the company is improved compared to 2018 report. iii. Areas of concern in cash flow management In 2019, closing balance is much less than 2018, which indicates less liquidity compared to previous year. This is due to cash used in operating activities and investing activities. To meet this cash outs; Trend Ltd. has borrowed money by paying 72k pounds interest on it. The current investment is not performing well as compared to previous year; as interest received is decreased from 40 to 15k pounds, despite increasing in investment. 3. Assess the concerns raised by Priya and Sally Priya and Sally’s family concerned about decrease in net profit during the year and also have fear for uncertainty in market and changes in government policies. Taking loan in exchange of paying 72k pounds as a interest money could be risky for current situations; as there is inconsistency in market trend, government policy and fashion industry. Any decrease in demand could affect company’s revenue and net profit. This will lead to increase the risk of insolvency by business to pay interest. In this current situation; the best option for raising money could be equity compared to debt. But still it can take number of steps to improve financial performance of the company discuss below: Through minimizing variable cost per unit of the production. To take measures to decrease the operating expenses. Making budgets like rolling and annual budgeting to track control and monitor the expenses.
ï‚·Focus on increasing the liquidity of the activities to gain more cash to invest in expansion of the business and enhancing sales revenue through marketing and advertisement. ï‚·Either sales needs to be increased or expenses need to be minimized to improve financial performance of the company (Ou and Penman, 1989).
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REFERENCES Books and Journals Foster, G., 1986.Financial Statement Analysis, 2/e. Pearson Education India. Fridson, M.S. and Alvarez, F., 2011.Financial statement analysis: a practitioner's guide(Vol. 597). John Wiley & Sons. Ou, J.A. and Penman, S.H., 1989. Financial statement analysis and the prediction of stock returns.Journal of accounting and economics,11(4), pp.295-329. Penman, S.H., 2013.Financial statement analysis and security valuation. McGraw-Hill. Robinson, T.R., 2020.International financial statement analysis. John Wiley & Sons. Subramanyam, K.R., 2009.Financial statement analysis. Includes index.