Financial Statements Analysis Example

This assignment provides a sample balance sheet for a fictional company named 'A Wonderland', dated June 30, 2017. It details the company's current assets (cash, accounts receivable, inventory, etc.), non-current assets (furniture), current liabilities (accounts payable, wages payable), and owners' equity. The document is useful for understanding how to read and analyze a balance sheet, a key financial statement.

Financial Report
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Executive Summary
The report has been developed in order to provide an analysis of financial
performance of Wonderland Construction Supplies. The analysis is carried out through
interpretation of its financial statements and financial ratios.
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Introduction
The financial statement analysis of business entities helps in developing an in-depth
understanding of their present and future financial position. In this context, the report has
provided an evaluation of the financial performance of Wonderland Construction Supplies
through analysis of its financial ratios. The company has been started with the initial capital
of $70,000 and has prepared its financial statements with due consideration of all the
significant adjustments of the overall year. The report has also provided a discussion of the
methods of depreciation, inventory management and internal control used by the company for
improving its profitability and growth.
Financial Statement Analysis
The financial statements developed by the business corporations includes income
statements, balance sheet, cash flows and equity statements for disclosing the financial facts
and figures related to the current reporting period. In this context, the analysis of the financial
statements as developed by Wonderland is carried out as follows:
 Income Statement: The income statement provides a description of the revenue,
expenditure, net income and earnings per share of a company over a period of time.
The analysis of the income statement of Wonderland states that the operating
expenditure is more than the revenue realized. Therefore, the company is advised to
reduce its operating expenditures for improving its profitability position.
 Statement of Equity: The statement represents the changes in equity structure if a
company over a period of time. It can be interpreted from the equity statement of
Wonderlands that it has an initial equity capital of $70,000 from which the amount of
$2000 has been withdrawn as drawings. The other reductions in equity capital are due
to loss incurred by the company.
 Balance sheet: The balance sheet of Wonderland has provided an analysis of its assets
and liabilities position on the reporting date (Bebbington, Gray and Laughlin, 2001).
Financial Ratios
Current ratio
The ratio provides an analysis of short and long-term liquidity position if a company
through providing a comparison of its assets and liabilities position. The formula used for
calculating current ratio is:
Current ratio=Current assets/Current liabilities
Wonderland Current ratio==$78,247.20/ $18,227.00
=4.5
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The company has a current ratio of 4.5 which is far better than the current ratio of the
competitor’s that is estimated to in between 1.5 to 2.5. This, the company has achieved a
sound liquidity position that will help it to achieve long-term growth.
Gross Profit
The ratio if gross profit provides an analysis of the current profits realized by a
company and can be measured through the formula:
Gross Profit Ratio=Gross Profit/Sales
Gross Profit Ratio=20,664.00/ $69,120.00 = 29.9%
The gross profit ratio of Wonderland is 29.9% that indicates that the company
profitability position is not so good. The competitors of the company are having a gross profit
ration of about 4.5% and therefore Wonderland should try to reduce its operating expenses
for improving the profits realised (Tracy, 2012).
Methods of Depreciation
The business entities incorporate the use of following tow methods for calculating
depreciation:
 Straight-line basis: The straight-line depreciation method is the simplest method used
by businesses for calculating depreciation. The method gradually reduces the carrying
value of non-current assets of the company as per its useful life.
 Reducing Balance: The declining balance method calculates depreciation over the
book value of an asset at the starting of a reporting period. The book value of an asset
refers to its value obtained after deducting accumulated depreciation from its cost
(Bebbington, Gray and Laughlin, 2001).
Inventory Management Techniques:
 FIFO (First in First Out): The method of inventory valuation is based on the assumption
that good purchases first will also be sold first. This means that cost of old inventory will
be recognized as expenses primarily during inventory valuation. LIFO (Last in Last Out): The method of inventory valuation assumes that inventory
purchased last is put to sale first (Hansen, Mowen and Guan, 2007).
Mechanism of Internal Control
The internal control procedures are developed by a company for ensuring the integrity
and authenticity if the financial information in order to meet its long-term goals and
objectives. As such, Wonderland can establish internal control mechanisms such as
developing Code of Conduct for employees and managers, developing risk and audit
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committee in order toe ensure that all business activities are carried as per the standard
guidelines (Harrer, 2008).
Conclusion
It can be said from the overall financial analysis of Woolworths that company though
is reporting reduce profitability but will be bale to provide strong financial results in the
coming period of time with its good liquidity position.
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References
Bebbington, J., Gray, R. and Laughlin, R. 2001. Financial Accounting: Practice and
Principles. Cengage Learning EMEA.
Hansen, D., Mowen, M. and Guan, L. 2007. Cost Management: Accounting and Control.
Cengage Learning.
Harrer, J. 2008. Internal Control Strategies: A Mid to Small Business Guide. John Wiley &
Sons.
Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to
Analyse Any Business on the Planet. RatioAnalysis.net.
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Appendix
Income Statement
1st July 2016 to 30th June 2017
$
REVENUE:
Sales Revenue $ 69,120.00
Less: Cost of goods Sold $ 48,956.00
$ 20,164.00
Add: Discount Received $ 500.00
Gross Profit $ 20,664.00
EXPENSES:
Advertising Expense $ 1,500.00
Bad Debts expense $ 116.05
Dep - Furniture $ 833.70
Discount Allowed Expense $ 855.50
Wages Expense $ 7,644.00
Supplies Expense $ 365.00
Inventory Loss $ 680.00
Rent Expense $ 12,000.00
Insurance Expense $ 2,700.00
TOTAL EXPENSES $ 26,694.25
Net Profit or Loss -$ 6,030.25
Equity Statement
30th June 2017
$
Beginning Equity $ -
Add: Capital contributions $ 70,000.00
Less: Drawings $ 2,000.00
Less: Loss $ 6,030.25
Ending Equity $ 61,969.75
Balance Sheet
as at 30th June 2017
$
Current Assets:
Cash at Bank $ 55,119.50
Accounts Receivable $ 2,321.00
Less: Provision for Doubtful Debts
$
(116.05)
Supplies $ 155.00
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Inventory $ 11,744.00
Prepaid Insurance $ 900.00
Prepaid rent $ -
GST Paid $ 8,128.00
Total Current Assets
$
78,251.45
Non-current Assets:
Furniture at cost $ 2,779.00
Less: Accumulated Depreciation $ 833.70
Total Non-current Assets
$
1,945.30
Total Assets
$
80,196.75
Current Liabilities:
Accounts Payable $ 8,844.00
GST Collected $ 6,827.00
PAYG Tax Payable $ 312.00
Wages Payable $ 2,244.00
Total Current Liabilities
$
18,227.00
Non-current Liabilities: $ -
Total Non-current Liabilities $ -
Total Liabilities
$
18,227.00
NET ASSETS
$
61,969.75
Owners' Equity:
A Wonderland, Capital $ 61,969.75
Total Owners' Equity
$
61,969.75
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