Financial Analysis of Barkes Computers: Accounting for Decision Making

RUNNING HEAD: ACCOUNTING FOR DECISION MAKING
Financial analysis

Accounting for decision making 2
Contents
Introduction.................................................................................................................................................3
Financial analysis........................................................................................................................................3
Horizontal analysis..................................................................................................................................4
Vertical analysis......................................................................................................................................7
Ratio analysis..........................................................................................................................................9
Net Profit ratio...................................................................................................................................10
Gross Profit ratio...............................................................................................................................10
Return on equity................................................................................................................................10
Return on assets.................................................................................................................................10
Asset turnover....................................................................................................................................11
Current ratio......................................................................................................................................11
Debt-to-equity ratio...........................................................................................................................11
Conclusion.................................................................................................................................................12
References.................................................................................................................................................13

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Introduction
The report includes the overall analysis of Barkes Computers who is a wholesaler of computer
hardware for the past five years. It highlights the company’s performance during the past years
and provides insights to the chairman and other senior managers about the same. The objective
of preparing such report is to advice the chairman on company’s position and performance and to
recommend about the decision to be taken in respect of senior managers’ demand for big bonus.
The report applies financial tools and techniques to evaluate Barkes’ final accounts considering
various calculations that facilitates good decision making. At the end, a conclusion has been
provided that covers all the findings of the analysis.
Financial analysis
It is a procedure of evaluating businesses, budgets, projects, and other finance related
organization in order to determine their performance and appropriateness as per the industry
standards. Generally, the process is followed by the companies to check their stability, solvency,
liquidity and profitability (Warren, Reeve & Duchac, 2011). It helps in deciding that whether the
firm is the best option for making monetary investment or not. Many financial analysts use this
technique to study the trend followed by a business and evaluate the long term plans made by it.
The analysis is based on the quantitative data presented in the annual report of the company. It
includes assessment of the past data so as to make predictions for future. There are several
techniques and methodologies applied for conducting financial analysis of a company (Nikolai,
Bazley & Jones, 2009). They include horizontal and vertical analysis, ratio analysis, peer
analysis, technical and fundamental analysis and many others. The most commonly used tools

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and techniques are explained in the report which measure Barkes’ performance from every
aspect and notice the changes in every line item of its balance sheet and income statement
(Helfert & Helfert, 2001).
Horizontal analysis
It is one of the tools of financial analysis that reflects the changes in the corresponding items of
financial statements over a period of time. It is used to measure the past trend followed by the
company. The statements taken for the analysis are of more than two years among which one is
considered as the base. On the basis of that base year, the variations in other years in the items
are calculated and then the results are interpreted. The changes can be reported in both dollar
format and percentage format (Sinha, 2012).
Barkes Computer’s balance sheet and income statement are evaluated by using horizontal
analysis and the interpretation regarding its performance has been made. In that case, 2013 has
been considered as the base year and the changes over other years have been noticed.
The analysis of income statement states that over the past five years, the company has reported
constant increase in its revenue of 66%, 110%, 156% and 250% respectively. Along with this, its
gross profit also increased by 54% in 2017 and 36% in 2016 as compare to the base year 2013.
However, the firm reported high COGS which make it earn low profits. Despite of increased
expenses, Barkes reported an upsurge in the net profit of 86% last year. Also prior to that, its net
profit after tax has shown an increase of 55%, 31% and 17% as compare to 2013. Overall, with
the strong sales and profits Barkes has improved its financial performance during the period
2013-2017.