Financial Performance Analysis of J.Prep Retail Store

Financial Accounting
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Introduction
The present report is developed for carrying out an analysis of the financial performance
of J.Prep that is a clothing retail store carrying out its business through a franchise model. The
company at present is facing the issue of declining cash inflows in one of its store despite of the
good sales realized. As such, the report provides an assessment of the initial performance of the
store with the use of ratio analysis technique. Also, it has presented the development of balance
and income sheet for the
company for the month in which it faced credit crunch. In addition to this, the company has
taken the loan form a saving bank to meet the cash obligations. The report in this context, it
examines whether the decision is accurate to improve the operating management cycle of the
company.
J. Prep Company (A)
Answer 1: Preparation of J. Prep Balance Sheet as of November, 30
Profit and loss Account (October) (J. Prep)
Particulars Amount
Sales $ 80,000.00
Less: Cost of Sales $ 45,000.00
Gross Profit $ 35,000.00
Depreciation $ 1,500.00
Rent $ 15,000.00
Credit Card Fees $ 3,000.00
Wages $ 8,000.00
Utility $ 2,000.00
Net Profit $ 5,500.00
Balance Sheet (J. Prep)
as on 31 October
Liabilities Amount Assets Amount
Inventory $ 195,000.00
Equipment 180000
Less: Accu. Depreciation 1500 $ 178,500.00
Contributed Capital $ 400,000.00 Cash $ 32,000.00
Retained Earnings $ 5,500.00
$ 405,500.00 $ 405,500.00
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Profit and loss Account (November) (J. Prep)
Particulars Amount
Sales $ 130,000.00
Less: Cost of Sales $ 70,000.00
Gross Profit $ 60,000.00
Depreciation $ 1,500.00
Rent $ 15,000.00
Credit Card Fees $ 5,000.00
Wages $ 11,000.00
Utility $ 2,000.00
Salary $ 10,000.00
Net Profit $ 15,500.00
Balance Sheet (J. Prep)
as on 30 November
Liabilities Amount Assets Amount
Inventory
$
240,000.00
Equipment 180000
Less: Accu. Depreciation 3000
$
177,000.00
Contributed Capital
$
400,000.00 Cash
$
4,000.00
Retained Earnings
$
21,000.00
$
421,000.00
$
421,000.00
Answer 2: Financial performance of J. Prep in month of October and November
In order to analysis the financial performance of J. Prep it has been decided to use ratio
analysis.
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Ratios October
Novembe
r
Gross profit 43.75% 46.15%
Net profit 6.88% 11.92%
Return on assets 1.36% 3.68%
Return on Equity 1.38% 3.88%
Inventory Turnover ratio 0.41 0.54
Asset Turnover ratio 0.20 0.31
The financial performance of J. Prep can be evaluated with the use of technique of ratio
analysis that provides an insight into its financial health. The results of the profitability ratio’s
such as gross profit, net profit, return on assets and return on equity has depicted that company’s
profitability has increased over the first two months of operations. Also, its efficiency analysis
with the use of calculation of ratio’s such as inventory turnover and asset turnover ratio that its
ability to utilize assets for realizing sales has been improved. The financial leverage of the
company is also assessed by the use of debt-equity ratio and it can be stated that it is adopting
higher use of equity in its capital structure (Damodaran, 2011).
Answer 3: Operating Cycle of J. Prep
It can be stated from the overall analysis of the case study that Mr. Larsen is not able to
manage effectively the cash position of J.Prep in the franchise model. The company is largely
realizing sales on credit basis to the customers. Thus, despite of realizing higher sales within the
store there is shortage of liquidity due to which the company is currently facing the risk of not
effectively meeting its financial obligations in the future context. In this context, it is
recommended to the company to improve its liquidity position by improving the cash flows by
realizing cash sales rather than emphasising promoting sales to the customers on credit basis
(Davies and Crawford, 2011).
Conclusion
It can be concluded from the overall analysis that the retail store of Mr. Larsen operating
under the franchise of J.Prep is facing the issue of cash crunch. The loan taken by Mr. Larsen for
overcoming the cash crunch has resulted in improving the cash management cycle of the
company. The financial ratio analysis of the store performance over the initial two months of
establishment has depicted that it has good profitability but its efficiency in turning inventory to
sales is not adequate.
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