Financial Analysis of a Company

This assignment presents a financial analysis of a company. It evaluates the company's gross profit margin, comparing it to competitor levels and identifying areas for improvement. The analysis also includes a discussion of depreciation methods, inventory valuation (FIFO), and internal control mechanisms. The report concludes with recommendations for enhancing risk management and operational efficiency.

FINANCIAL ANALYSIS OF WONDERLAND CONSTRUCTION
SUPPLIES
Student Name:
Student ID:
10/3/2017

EXECUTIVE SUMMARY
The title of the report is the financial analysis of the Wonderland Construction Supplies. As the title
suggests, the main aim of the report is to analyze the statement of income, statement of affairs and the
statement showing changes in equity of the company. The second major aim is to calculate the financial
ratios and analyzing the same with regard to the competitor benchmarks. The third major aim is to
ascertain the different methods adopted by the company for the calculation of depreciation and
valuation of inventory. With these aims, the report has been prepared and made available under
different sub headings.

Contents
EXECUTIVE SUMMARY.................................................................................................................................2
1.0INTRODUCTION......................................................................................................................................3
2.0FINANCIAL ANALYSIS..............................................................................................................................3
2.1FINANCIAL STATEMENTS....................................................................................................................3
2.2FINANCIAL RATIOS..............................................................................................................................3
2.3DEPRECIATION....................................................................................................................................3
2.4INVENTORY.........................................................................................................................................3
2.5INTERNAL CONTROL MECHANISMS....................................................................................................3
3.0 CONCLUSION.........................................................................................................................................3
4.0 LIST OF REFERENCES..............................................................................................................................3

1.0INTRODUCTION
The financial statements of any company help in ascertaining the financial position and the financial
performance of the company. In the given case, the financial statements of the Wonderland
Construction Supplies have been discussed and analysed for the year ending 30th of June 2017. At first,
the financial statements have been discussed with regard to the balances of each and its respective
relation to other item. Secondly, the accounting ratios including the current ratio and others have been
calculated and discussed and compared with the competitors. Thirdly, the method adopted for the
calculation of the depreciation and methods thereof have been discussed along with the advantages and
disadvantages. Similarly in the fourth section, inventory valuation methods have been detailed and its
likely impact on the financial statements. At the end the internal control measures have been listed and
detailed. The report has then ended up with the appropriate conclusion summarizing the whole study.
2.0FINANCIAL ANALYSIS
2.1FINANCIAL STATEMENTS
The financial statement consists of three major statements – balance sheet, income statement and the
statement showing changes in equity (Kothari and Ball, 2014).
The balance sheet of the company depicts that the company has the net assets of $62420 and has zero
noncurrent liabilities.
The income statement of the company depicts that the company has incurred the net loss of $5580 for
the period ending 30th of June 2017 and has gross profit of $20664.
The equity movement statement shows that the no additions have been made in the equity. Only
deductions have been made as drawings and loss (Subramanyam and Wild, 2009).
FINANCIAL STATEMENTS
Income Statement
1st July 2016 to 30th June 2017
$
REVENUE:
Sales Revenue $ 69,120.00
Discount Received $ 500.00
Total Revenue $ 69,620.00
Cost of Goods Sold $ 48,956.00
Gross Profit $ 20,664.00

EXPENSES:
Advertising Expense $ 1,500.00
Bad Debts expense $ 116.00
Dep - Furniture $ 1,836.00
Discount Allowed
Expense $ 940.00
Wages Expense $ 5,152.00
Supplies Expense $ 365.00
Inventory Loss $ 680.00
Rent Expense $ 13,200.00
Insurance Expense $ 2,455.00
TOTAL EXPENSES $ 26,244.00
Net Profit or Loss -$ 5,580.00
Balance Sheet
as at 30th June 2017
$
Current Assets:
Cash at Bank $ 61,442.00
Accounts Receivable $ 2,321.00
Provision for Doubtful Debts -$ 116.00 $ 2,205.00
Supplies $ 155.00
Inventory $ 8,404.00
Prepaid Insurance $ 818.00
Prepaid rent $ -
GST Paid $ 8,144.91
Total Current Assets $ 81,168.91
Non-current Assets:
Furniture at cost $ 6,119.09
Less : Accumulated Depreciation -$ 1,836.00 $ 4,283.09
Total Non-current Assets $ 4,283.09
Total Assets $ 85,452.00
Current Liabilities:
Accounts Payable $ 13,844.00
GST Collected $ 6,912.00
PAYG Tax Payable $ 312.00
Wages Payable $ 1,964.00
Total Current Liabilities $ 23,032.00

Non-current Liabilities:
Total Non-current Liabilities $ -
Total Liabilities $ 23,032.00
NET ASSETS $ 62,420.00
Owners' Equity:
A Wonderland, Capital $ 62,420.00
Total Owners' Equity $ 62,420.00
Equity Statement
30th June 2017
$
Beginning Equity
add Capital contributions $ 70,000.00
Less: Drawings -$ 2,000.00
Less: Loss -$ 5,580.00
Ending Equity $ 62,420.00
2.2FINANCIAL RATIOS
Current Ratio
The current ratio is calculated by dividing the current assets by the current liabilities. As per the industry
norms, the minimum current ratio shall be 1.30 to 1.50. As the company has the current ratio of 3.52,
which depicts that the company has the high liquidity position (Deakin, 2016).
On comparing the current ratio with that of the competitors operating in the same industry, the
company is in the good position. The competitor’s level for the current ratio is 1.50 to 2.70 but the
company has crossed the maximum level and thus the company has the high liquidity position.
Gross Profit Ratio
The gross profit ratio is calculated by dividing the gross profit figure by the sales revenue figure. Higher
the gross profit, higher is the trade margin that the company earns. In the given case, the company has
earned the gross profit of 29.90 % (Watson, Shrives and Marston, 2002).
The competitor’s level of gross profit is between the 38% and 43%. The company has not even crossed
the minimum level and thus is not operating the functions in good manner.

S. No Particulars Amount ($) Ratios
1 Current Ratio
Current Assets $ 81,168.91
Current Liabilities $ 23,032.00 3.52
2 Gross Profit Ratio
Gross Profit $ 20,664.00
Sales Revenue $ 69,120.00 29.90
2.3DEPRECIATION
There are two methods available for depreciating the assets. One is straight line method and second is
reducing balance method. Under the straight line method, the equal amount of depreciation is charged
over the useful life of the asset whereas in the latter method, the depreciation is charged on the closing
balance at the specified percentage.
The major difference is that the net carrying amount under former method will be zero but in the latter
method it can never be equal to zero.
2.4INVENTORY
The other method of inventory valuation is the First in First out (FIFO). It measures the closing stock at
the value of the recent purchase price of the item and thus will have the value of inventory depending
upon the market conditions.
2.5INTERNAL CONTROL MECHANISMS
The company shall put in place the system for the following:
 The valuation of the inventory and the physical verification on the periodical basis.
 Daily update on the cash and bank position
 Reconciliation of the bank balance on daily basis.
 Proper calculation of the depreciation, etc.

3.0 CONCLUSION AND RECOMMENDATION
To conclude the report, each item of the financial statements plays the very important role in the
functioning of the company. The company shall manage all its working in such manner that the results
shall be in parlance with the market conditions and the results quoted by the competitors.
It is recommended to put in place the system which can manage and reduce the risk of any
discrepancies.
4.0 LIST OF REFERENCES
Deakin, E.B.,(2016), “Distributions of financial accounting ratios: some empirical evidence” The
Accounting Review, 51(1), pp.90-96.
Kothari, S.P. and Ball, R., (2014), “Financial statement analysis”, Mcgrew-Hill Companies.
Subramanyam, K.R. and Wild, J.J.,( 2009), “Financial statement analysis”. McGraw-Hill.
Watson, A., Shrives, P. and Marston, C., (2002), “Voluntary disclosure of accounting ratios in the UK”,
The British Accounting Review, 34(4), pp.289-313.