Passion Soles Forecasted Financial Statements Analysis

This report analyzes Passion Soles forecasted financial statements including income statement, balance sheet, cash budget, and marginal costing statement. It provides insights about the company's profitability, efficiency, liquidity, and financial risk. The report concludes that investing in Passion Soles can be a less risky and high return option for investors.

RUNNING HEAD: ACCOUNTING AND FINANCE
Accounting

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Introduction
Passion Soles Inc. is a women footwear company, operating its business in United Kingdom. It
exclusively deals with providing various design of footwear for women. The company has an
extensive selection of different shoes and provide best quality product to its customers. It has
recently started its business in UK and is looking for a potential investor to invest in the business.
This report contains a study of the Passion Soles forecasted financial statements, on the basis of
which the company will convince an investor to invest his funds in its business. A greater insight
is been provided to the investor about the company’s future performance with the help of its
financial reports.
Understanding of Statements
Passion Soles has made four financial statements that reflect the future financial performance of
the entity and also provides an idea to the investor about company’s operations.
Income Statement
It is financial statement that reports about firm’s performance in financial terms. It provides a
summary of business’s revenues and expenses through both operating and non-operating
activities (Ittelson, 2009).It also shows the net profit or loss incurred over a specific fiscal year. It
is the legal requirement of the company to prepare its statement of income and display the same
in its annual reports. This helps in providing information about the profitability position of the
company to the investor public (Fridson and Alvarez, 2011).Looking at the forecasted income
statement of Passion Soles Inc. it can be said that company will generate a net profit of £750,000
and gross profit of £1,200,000 at the end of year 2018. This clearly indicates that Passion Soles is
capable of covering its fixed and variable cost with its revenue amounted to £3,000,000. A

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positive profit figure will also generates more returns on the investor’s investments. Also the
statement shows that, Passion has high R&D cost which indicates that company is focused on
innovating new designs in its product which make it attractive for the customer.
Balance sheet
It is a statement of financial position that summarizes all the account balance of the company. It
shows the total assets and liabilities of a firm and provides insights about its position in the
market (Makoujy, 2010). It is base used for evaluating the capital structure of an organization. It
helps the investor to know about the portion of debt and equity used by a firm (Parker,
2007).Passion Sole’s balance sheet shows that the company has started its operations with the
capital invested by the owner amounted to £300,000. It does not have any interest bearing
borrowings which indicates that there is no debt taken by the firm. Also, it has a cash balance of
£385,000 at the end of the year. The creditors of the company are £80,000 which are less than
the debtor of amount £100,000. This means Passion Soles is able to pay its creditors quickly. It
represents the credibility of the firm and ability to manage its assets and financial liabilities.
When observing the statement overall, it is observed that the current assets of the company is
way more than its current liabilities. Also its section of capital and liabilities comprises of
£990,000 equity. This implies that Passion Soles does not rely on debt financing and has a strong
liquidity position.
Cash budget
It includes all the business transactions that are made on cash basis. Basically it shows the cash
receipts and cash expenditure of a company. In the last, the cash balance is been shown which,
the business retain at the year end after paying all its cash expenses (Shim, Siegel and Shim,

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2011). It is basically an approximation of cash inflow and outflow in the entity over a specific
period of time. It is important to prepare as it gives an idea about company’s ability to manage its
cash balance for its operations. Passion Soles’ budget shows that company will make cash sales
of £150,000 every month throughout the year. Its credit sales for every month amounted to
£100,000 and also it shows that there will be no deficit during the whole year. The net cash flow
figures will remain positive and the cash receipts will be more than the payment during the year.
All such facts and figures imply that Passion Soles is very much efficient in managing its cash
flows and will never get out of cash in the business. Such high liquidity factor can make an
investor prepare his mind for investing funds in the business. The budget shows that company is
capable of maintaining its operations along with its liquidity position (Weikart, Chen and
Sermier, 2012).
Marginal Costing Statement
This statement shows the marginal cost of the firm which is also known as variable cost. It also
reflects the fixed cost and the amount of total contribution required to cover up the fixed cost.
Marginal costing is basically a costing technique used for making decisions. It helps the
management in assessing the changes that has occurred due to the decisions taken (Alex,
2011).The marginal costing statement of Passion Holes shows that the company has 60%
variable cost and 40% fixed cost of the selling price £20.00 per unit. In the whole year, Passion
Soles will sell 150,000 units to achieve a profit of £750,000. Also the contribution of the
company is £1,200,000 which is very much enough to cover the fixed cost of £450,000. On the
basis of this, Passion Soles has prepared its income statement and others.
Conclusion

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From the above report, it can be concluded that Passion Soles will outperform in the fiscal year
2018. It has profitability, efficiency and liquidity position. Also the company has zero financial
risk as there is no long term debt accounted in company’s financials. Looking at the
performance, the investor must invest its funds in Passion Soles as, it is less risky, will give high
return and is able to maintain its strong position in the market. So, overall making investment in
this company can be a best option for an invest

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References
Alex, K. (2011). Cost accounting. India: Pearson Education.
Fridson, M.S. and Alvarez, F. (2011). Financial statement analysis: a practitioner's guide (Vol.
597). 4th ed. New Jersey: John Wiley & Sons.
Ittelson, T.R. (2009). Financial statements: A step-by-step guide to understanding and creating
financial reports. Franklin Lakes: The Career Press
Makoujy, R. (2010). How to Read a Balance Sheet: The Bottom Line on What You Need to Know
about Cash Flow, Assets, Debt, Equity, Profit... and How It all Comes Together. USA: McGraw
Hill Professional
Parker, R.H. ed. (2007). Understanding company financial statements. 6th ed. UK: Penguin
Books.
Shim, J.K., Siegel, J.G. and Shim, A.I. (2011). Budgeting basics and beyond (Vol. 574). 4th ed.
USA: John Wiley & Sons.
Weikart, L.A., Chen, G.G. and Sermier, E. (2012). Budgeting and financial management for
nonprofit organizations. USA: CQ Press.