Financial Reporting Analysis: Performance Evaluation Report - 2017-18

This report provides a comprehensive analysis of a company's financial performance, focusing on various aspects of financial reporting. The analysis begins with an examination of the monthly cash flow from business operations, highlighting fluctuations and the overall net cash flow expected for the year 2017-18. It then delves into break-even point analysis, calculating the sales level required to cover fixed costs. The report further evaluates profitability ratios, including gross profit margin and net profit margin, assessing the company's ability to generate profits. Liquidity and efficiency ratios, such as current ratio, acid-test ratio, and inventory turnover, are also analyzed to gauge the company's short-term solvency and operational efficiency. The report concludes by summarizing the company's expected improved financial position based on the analyses of the provided financial data and ratios.

Running Head: Financial Reporting
Financial Reporting
Name of the Student:
Name of the University
Authors Note:

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Table of Contents
Question 1:.......................................................................................................................................2
Question 2:.......................................................................................................................................5
References:......................................................................................................................................8

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Question 1:
Statement showing forecasted Net profit for the year 2017-18
Particulars July August September October Novemebr December January February Mrch April May June
Sales 200000 200000 225000 225000 250000 300000 350000 350000 300000 250000 200000 150000
Purchases 160,000.00 160,000.00 180000 190000 200000 230000 280000 290000 240000 200000 160000 110000
Salaries 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00
Wages 3,000.00 3,000.00 4000 4000 5500 6000 7500 7500 6000 5000 3000 2500
Rent and rates 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00
Advertisement 1,500.00 2,000.00 2000 2500 3000 4000 5000 6000 4000 2000 2000 2000
Other expenses 4,000.00 4,000.00 4500 5000 5500 7000 9000 9500 5500 5500 5500 3500
Projected cash flow Statement
Cash flow forecast July August September October Novemebr December January February Mrch April May June
Cash slaes 50,000.00 50,000.00 56,250.00 56,250.00 62,500.00 75,000.00 87,500.00 87,500.00 75,000.00 62,500.00 50,000.00 37,500.00
Cash collected from debtors 168,750.00 168,750.00 150000 150000 168750 168750 187500 225000 262500 262500 225000 187500
(A) Total cash received 218,750.00 218,750.00 206,250.00 206,250.00 231,250.00 243,750.00 275,000.00 312,500.00 337,500.00 325,000.00 275,000.00 225,000.00
Cash purchases 80,000.00 80,000.00 80,000.00 80,000.00 80,000.00 80,000.00 80,000.00 80,000.00 80,000.00 80,000.00 80,000.00 80,000.00
Cash paid to creditors 107,500.00 80,000.00 80,000.00 100,000.00 110,000.00 120,000.00 150,000.00 200,000.00 210,000.00 160,000.00 120,000.00 80,000.00
Salaries paid in case 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00
Rent and rates paid 16,500.00 16500 16500 16,500.00
Other expenses 600.00 600.00 800.00 1,000.00 1,200.00 1,800.00 2,600.00 2,800.00 1,200.00 1,200.00 1,200.00 400.00
Miscellaneous expenses paid (Ju 900.00 900.00 900 900 1200 1500 1800 2700 3900 4200 1800 1800
Advertisement 1,500.00 2,000.00 2000 2500 3000 4000 5000 6000 4000 2000 2000 2000
(B) Total cash paid 215,000.00 171,500.00 171,700.00 208,900.00 203,400.00 215,300.00 263,900.00 299,500.00 307,100.00 271,900.00 213,000.00 172,200.00

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Less: Fixed costs
Salaries 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00 8,000.00
Rent and rates 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00 5,500.00
Depreciation 2,500.00 2,500.00 2,500.00 2,500.00 2,500.00 2,500.00 2,500.00 2,500.00 2,500.00 2,500.00 2,500.00 2,500.00
Break even point 40.98
Contribution (%)` 15.62
BEP point 1,229,193.34
The monthly cash flow from business operation as is provided in the table above clearly showing
that there will be significant fluctuations in operating cash flows in different months of the
coming year. The fact that the expected cash flow from operating activities for the month of
October, 2017 will be in negative, i.e. (£2650) and the company even expected to have as much
as £62000 from operating activities, i.e. in the month of May, 2018 it is clear that though the
sales and purchases are more or less similar in different months the cash collection from business
and subsequent cash payments are not in conformity with the operating activities of the
company. However, the company is expected to have £361600.00 in net cash flow from
operating activities after meeting all operating expenses for the coming year 2017-18. Thus, the

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business is expected to generate significant amount of net cash inflow from business activities in
the next year. The main reason that the company is expected to have such favorable cash from
operating activities is the improved ability of the company to collect cash from its debtors
(Mohanram et. al. 2017).
Apart from that the company has been allowed one month period to pay the creditors which has
helped the company to maintain proper cash balance from business operations. The reduced
expenditures and enhanced amount of cash sales have also played their parts in helping the
company to maintain such cash balance month after month.
Breakeven point analysis is about ascertaining the point of sales (either in number of units or
sales value) at which the cost of the organization will be equal to the revenue from sales. Thus, at
break-even point the cost of sales will be exactly equal to the amount of revenue. In case of
finding the break-even point in number of units then the fixed costs of the organization is divided
by the amount of contribution per unit (Ishibashi et. al. 2016). Contribution is the resultant
balance from sales after deduction of variable costs from sales revenue. In case of assessment of
break-even point in sales the amount of fixed costs is divided by the PV ratio. PV ratio on the
other hand is calculated by using the following formula:
Contribution X 100 / Sales
Thus in case of assessment of break-even point the fixed costs of the company has to be used. As
can be seen in the table below that firstly, the amount of contribution has been ascertained to
calculate the PV ratio.
Contribution (Sales - variable costs) 468,500.00

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Less: Fixed costs
Salaries 96,000.00
Rent and rates 66,000.00
Depreciation 30,000.00
192,000.00
Breakeven point 40.98
PV ratio (%) 15.62
BEP point (£) 1,229,193.34
Considering the expected fixed cost of the company will remain £192000 the expected sales will
have to be £1229193.34 in the next year in order to achieve the point of no gain no loss. Thus,
provided the variable cost will remain in accordance with forecast and the fixed cost will be
£192000 then the company will have to achieve sales of £1229193.34 to achieve the point of no
loss no gain (Canagaratna et. al. 2015).
Question 2:
Profitability ratios are ratios which helps us to assess the financial performance level of an
organization as higher profitability ratios will suggest that the company will be able to earn
significant amount of profit from its business operations which is always a positive sign for the
growth of the company. The gross profit margin calculated by using the following ratio;
Gross profit X 100 / sales.

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The gross profit margin of the company has reduced in the year 2017-18 as compare to the
previous year. The GP ratio of the company for the coming year is expected to decrease to
16.80% as opposed to the 18.15% in the previous year. However, despite the reduction in gross
profit the net profit margin of the company has improved significantly with 9.22% NP ratio in
2017-18 is higher than 6.225 in the year 2016-17. Thus, the overall net profit margin of the
company has improved which is very encouraging sign for the stakeholders of the company
(Templeton et. al. 2014).
Particulars 2016-17 2017-18
Sales 2,700,000.00 3,000,000.00
Gross Profit 490,000.00 504,000.00
Gross profit margin 18.15 16.80
Net profit 170,000.00 276,500.00
Net profit margin 6.30 9.22
Liquidity
Current assets 382,000.00 743,600.00
Current liabilities 252,000.00 292,400.00
Current ratio 1.52 2.54
Acid test ratio
Current assets 142,000.00 264,488.89
Current liabilities 252,000.00 292,400.00

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0.56 0.90
Efficiency
Inventory turnover (Times) 11.25 6.26
The liquidity ratio: The liquidity ratios include current ratio, calculated by dividing the current
assets of an organization with its current liabilities and acid test ratio is calculated by dividing the
current assets less inventories with current liabilities. The current ratio as well as acid-test ratio
both have improved significantly in 2017-18, i.e. current ratio of 2.54 compare to 1.52 in the
year 2015-16. Similarly the acid-test ratio has also improved significantly with 0.90 in the year
2017-18 as compare to 0.56 in the previous year (Grimm and Blazovich 2016).
The efficacy ratio however tells a different story as the efficiency of the company seems to have
affected adversely with deterioration of inventory turnover ratio of 6.26 times in the coming year
from 11.25 times of the previous year.
Thus, from the above analyses of cash flow statement, break-even point and different financial
ratios of the company it is certainly clear that the company is expected to improve its financial
performance and position in the future provided the information about the company materialize
in the future (Grant 2016).

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References:
Marshall, D., 2016. Accounting: What the numbers mean. McGraw-Hill Higher Education.
Phillips, F., 2016. Withholding Financial Statement Analysis Formulas When Instructing and
Testing: A Desirable Difficulty.
Mohanram, P., Saiy, S. and Vyas, D., 2017. Fundamental analysis of banks: the use of financial
statement information to screen winners from losers. Review of Accounting Studies, pp.1-34.
Ishibashi, K., Iwasaki, T., Otomasa, S. and Yada, K., 2016. Model Selection for Financial
Statement Analysis: Variable Selection with Data Mining Technique. Procedia Computer
Science, 96, pp.1681-1690.
Grant, R.M., 2016. Contemporary Strategy Analysis Text Only. John Wiley & Sons.
Grimm, S.D. and Blazovich, J.L., 2016. Developing student competencies: An integrated
approach to a financial statement analysis project. Journal of Accounting Education, 35, pp.69-
101.
Templeton, A.J., McNamara, M.G., Šeruga, B., Vera-Badillo, F.E., Aneja, P., Ocaña, A.,
Leibowitz-Amit, R., Sonpavde, G., Knox, J.J., Tran, B. and Tannock, I.F., 2014. Prognostic role
of neutrophil-to-lymphocyte ratio in solid tumors: a systematic review and meta-analysis. JNCI:
Journal of the National Cancer Institute, 106(6).
Canagaratna, M.R., Jimenez, J.L., Kroll, J.H., Chen, Q., Kessler, S.H., Massoli, P., Hildebrandt
Ruiz, L., Fortner, E., Williams, L.R., Wilson, K.R. and Surratt, J.D., 2015. Elemental ratio
measurements of organic compounds using aerosol mass spectrometry: characterization,
improved calibration, and implications. Atmospheric Chemistry and Physics, 15(1), pp.253-272.