ACC101 Case Study: Financial Analysis of Barkes Computers (2018)

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Case Study
AI Summary
This report presents a comprehensive financial analysis of Barkes Computers, a computer hardware wholesaler, based on its financial data from 2013 to 2017. The analysis employs horizontal, vertical, and ratio analysis techniques to evaluate the company's performance, including its sales growth, profitability, liquidity, and solvency. Horizontal analysis reveals trends in financial statement items over time, highlighting changes in revenue, cost of goods sold, expenses, and net profit. Vertical analysis provides a proportional view of the financial statements, expressing each item as a percentage of a base figure. Ratio analysis, including net profit ratio, gross profit ratio, return on equity, return on assets, asset turnover, current ratio, and debt-to-equity ratio, offers insights into the company's financial health. The analysis aims to provide recommendations to the chairman regarding a senior management bonus request, considering the company's financial position and performance.
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RUNNING HEAD: ACCOUNTING FOR DECISION MAKING
Financial analysis
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Accounting for decision making 2
Contents
Introduction.................................................................................................................................................3
Financial analysis........................................................................................................................................3
Horizontal analysis..................................................................................................................................4
Vertical analysis......................................................................................................................................7
Ratio analysis..........................................................................................................................................9
Net Profit ratio...................................................................................................................................10
Gross Profit ratio...............................................................................................................................10
Return on equity................................................................................................................................10
Return on assets.................................................................................................................................10
Asset turnover....................................................................................................................................11
Current ratio......................................................................................................................................11
Debt-to-equity ratio...........................................................................................................................11
Conclusion.................................................................................................................................................12
References.................................................................................................................................................13
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Accounting for decision making 3
Introduction
The report includes the overall analysis of Barkes Computers who is a wholesaler of computer
hardware for the past five years. It highlights the company’s performance during the past years
and provides insights to the chairman and other senior managers about the same. The objective
of preparing such report is to advice the chairman on company’s position and performance and to
recommend about the decision to be taken in respect of senior managers’ demand for big bonus.
The report applies financial tools and techniques to evaluate Barkes’ final accounts considering
various calculations that facilitates good decision making. At the end, a conclusion has been
provided that covers all the findings of the analysis.
Financial analysis
It is a procedure of evaluating businesses, budgets, projects, and other finance related
organization in order to determine their performance and appropriateness as per the industry
standards. Generally, the process is followed by the companies to check their stability, solvency,
liquidity and profitability (Warren, Reeve & Duchac, 2011). It helps in deciding that whether the
firm is the best option for making monetary investment or not. Many financial analysts use this
technique to study the trend followed by a business and evaluate the long term plans made by it.
The analysis is based on the quantitative data presented in the annual report of the company. It
includes assessment of the past data so as to make predictions for future. There are several
techniques and methodologies applied for conducting financial analysis of a company (Nikolai,
Bazley & Jones, 2009). They include horizontal and vertical analysis, ratio analysis, peer
analysis, technical and fundamental analysis and many others. The most commonly used tools
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Accounting for decision making 4
and techniques are explained in the report which measure Barkes’ performance from every
aspect and notice the changes in every line item of its balance sheet and income statement
(Helfert & Helfert, 2001).
Horizontal analysis
It is one of the tools of financial analysis that reflects the changes in the corresponding items of
financial statements over a period of time. It is used to measure the past trend followed by the
company. The statements taken for the analysis are of more than two years among which one is
considered as the base. On the basis of that base year, the variations in other years in the items
are calculated and then the results are interpreted. The changes can be reported in both dollar
format and percentage format (Sinha, 2012).
Barkes Computer’s balance sheet and income statement are evaluated by using horizontal
analysis and the interpretation regarding its performance has been made. In that case, 2013 has
been considered as the base year and the changes over other years have been noticed.
The analysis of income statement states that over the past five years, the company has reported
constant increase in its revenue of 66%, 110%, 156% and 250% respectively. Along with this, its
gross profit also increased by 54% in 2017 and 36% in 2016 as compare to the base year 2013.
However, the firm reported high COGS which make it earn low profits. Despite of increased
expenses, Barkes reported an upsurge in the net profit of 86% last year. Also prior to that, its net
profit after tax has shown an increase of 55%, 31% and 17% as compare to 2013. Overall, with
the strong sales and profits Barkes has improved its financial performance during the period
2013-2017.
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Accounting for decision making 5
Looking at the balance sheet, it can be interpreted that the company has reported a continuous
decrease in its total assets as its cash position and non-current assets reduced to a significant
extent. In contrast to it, the liability of the firm has shown an upsurge of 43% in 2017 and 22% in
2016 and 2015 as compare to 2013. However, the equity reduced by 38% in the last year. This
shows that though company has made profits but its financial position is not so promising at it
has increased its debt portion and reduced the assets.
Inco
me
state
ment 2017
Am
oun
t
%
chan
ge
20
16
Am
oun
t
%
chan
ge
20
15
Am
oun
t
%
chan
ge
20
14
Am
oun
t
%
chan
ge
2013
(base
year)
$m
$
m
$
m
$
m $m
Sales 469 335
250
%
34
3 209
156
%
28
1 147
110
%
22
2 88 66% 134
COGS 344 291
549
%
23
3 180
340
%
18
6 133
251
%
13
4 81
153
% 53
Gross
Profit 125 44 54%
11
0 29 36% 95 14 17% 88 7 9% 81
Expen
ses 48 8 20% 46 6 15% 41 1 3% 40 0 0% 40
EBIT 77 36 88% 64 23 56% 54 13 32% 48 7 17% 41
Tax 23 11 92% 19 7 58% 16 4 33% 14 2 17% 12
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Accounting for decision making 6
Net
Profit 54 25 86% 45 16 55% 38 9 31% 34 5 17% 29
Balan
ce
sheet
20
17
Amou
nt
%
chan
ge
20
16
Am
ount
%
chan
ge
20
15
A
mo
unt
%
cha
nge
20
14
A
mo
unt
%
cha
nge
2013
(base
year)
$m $m $m $m $m
Curre
nt
Assets
20
0 -20 -9%
20
5 -15 -7%
21
0 -10 -5%
21
5 -5 -2% 220
Noncu
rrent
Assets
56
00 -400 -7%
57
00 -300 -5%
58
00
-
20
0 -3%
59
00
-
10
0 -2% 6000
Total
Assets
58
00 -420 -7%
59
05 -315 -5%
60
10
-
21
0 -3%
61
15
-
10
5 -2% 6220
Curre
nt
Liabili
ties
45
0 30 7%
44
0 20 5%
43
0 10 2%
42
0 0 0% 420
Noncu 30 1000 50% 25 500 25% 25 50 25% 20 0 0% 2000
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Accounting for decision making 7
rrent
Liabili
ties 00 00 00 0 00
Total
Liabili
ties
34
50 1040 43%
29
40 530 22%
29
30
52
0 22%
24
20 10 0% 2410
Owne
rs
Equity
23
50 -1460
-
38%
29
65 -845
-
22%
30
80
-
73
0
-
19%
36
95
-
11
5 -3% 3810
Vertical analysis
It is considered as a proportional analysis in which each item of financial statement has been
measured as a percentage of another item. Usually, while analysing income statement the amount
of sales is taken as a base to find out the percentage of every line item and on the balance sheet,
the amount of total assets and total liabilities and equities is considered (Warren & Jones, 2018).
From the income statement, it has been noticed that though the net profit is increased in terms of
dollar but as a percentage it has been decreased from 22% to 12%. Reason being, the significant
increase in company’s COGS and expenses. From the balance sheet, it has been reflected that the
non-current assets covers 97% of the total assets while the non-current liabilities comprises of
87% of the total liabilities. Also the portion has been increased throughout the years. However,
in 2017 the equity reduced from 153% to 68% over the years. The company needs to focus on
reducing the content of long term debt as to reduce the financial risk.
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2017
%
change 2016
%
change 2015
%
change
201
4
%
change
201
3
%
change
$m $m $m $m $m
Sales 469 100% 343 100% 281 100% 222 100% 134 100%
COGS 344 73% 233 68% 186 66% 134 60% 53 40%
Gross
Profit 125 27% 110 32% 95 34% 88 40% 81 60%
Expenses 48 10% 46 13% 41 15% 40 18% 40 30%
EBIT 77 16% 64 19% 54 19% 48 22% 41 31%
Tax 23 5% 19 6% 16 6% 14 6% 12 9%
Net
Profit 54 12% 45 13% 38 14% 34 15% 29 22%
2017
%
change 2016
%
change 2015
%
change
201
4
%
change
201
3
%
change
$m $m $m $m $m
Current
Assets 200 3% 205 3% 210 3% 215 4% 220 4%
Noncurre
nt Assets 5600 97% 5700 97% 5800 97%
590
0 96%
600
0 96%
Total
Assets 5800 100% 5905 100% 6010 100%
611
5 100%
622
0 100%
Current
Liabilitie
450 13% 440 15% 430 15% 420 17% 420 17%
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Accounting for decision making 9
s
Noncurre
nt
Liabilitie
s 3000 87% 2500 85% 2500 85%
200
0 83%
200
0 83%
Total
Liabilitie
s 3450 100% 2940 100% 2930 100%
242
0 100%
241
0 100%
Owners
Equity 2350 68% 2965 101% 3080 105%
369
5 153%
381
0 158%
Ratio analysis
It is the most used and common technique which is applied by the analyst to measure the
performance from all the financial aspects. It covers all the dimensions like liquidity,
profitability, efficiency and solvency which help in evaluating the entire position of the company
(Gibson, 2011).
2017 2016 2015 2014 2013
Net profit ratio 11.51% 13.12% 13.52% 15.32% 21.64%
Gross profit ratio 26.65% 32.07% 33.81% 39.64% 60.45%
Return on equity 2.30% 1.52% 1.23% 0.92% 0.76%
Return on assets 0.93% 0.76% 0.63% 0.56% 0.47%
Asset turnover 0.08 0.06 0.05 0.04 -
Current ratio 0.44 0.47 0.49 0.51 0.52
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Accounting for decision making 10
Debt to equity
ratio 1.47 0.99 0.95 0.65 0.63
Net Profit ratio
It is a profitability ratio which represents the amount of profit as a percentage of total sales
(Godwin & Alderman, 2012). The trend followed by Barkes reflects that the NPR reduced from
21.64% to 11.51%. This was due to the fact that the company’s expenses increased over the
years.
Gross Profit ratio
It is another profitability ratio which reflects gross profit as a percentage of total revenue
(Higgins, 2012). The COGS of company increased from 2013 to 2017 which reduces the overall
GPR from 60.45% to 26.65%. COGS comprises of major part of total revenue which eventually
lowers its gross profit and effect the ratio to a great extent.
Return on equity
It determines the amount of return offered by the company to its shareholders out of the profits
retained by it (Jenter & Lewellen, 2015). However, the profit ratio of the company has reduced
over the years but it has high ROE in 2017 as compared to other years. It increased from 0.76%
to 2.30% due to the overall reduction in its owners’ equity amount.
Return on assets
It shows the return generated by the organization by properly and completely utilizing its total
assets and available resources. It is also a measure of company’s overall profitability (Bragg,
2012). The ROA of Barkes has constantly increased from 0.47% to 0.93% due to the increase in
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Accounting for decision making 11
its net profit and continuous reduction in its total assets. This anyway boosted up the ROA of the
company.
Asset turnover
It is one of the efficiency ratios which indicate the competency of the firm in generating more
revenue from utilizing its resources effectively and efficiently (Bragg, 2012). The ATR increased
from 0.04 times to 0.08 times. The ratio was very low which identifies that company is not that
much efficient enough to make more revenue from its assets.
Current ratio
It is a liquidity ratio which measures the financial strength of the company in paying off its short
term financial obligations with its current assets. The ideal ratio is 2:1 that is to be maintained by
every company (Vogel, 2014). In case of Barkes the ratio has been reduced from 0.52 to 0.44
due to the constant increase in its current liabilities. On the other side, the current assets of the
company declines over the past five years. This brings an overall decline in company’s current
ratio.
Debt-to-equity ratio
It is a gearing or long term solvency ratio which measures the financial risk of a company. It
evaluates the debt and equity element of the company against each other and reflects the portion
of assets which is financed through debt and the one financed through equity (Lee, Lee & Lee,
2009). The D/E ratio of Barkes increased continuously from 0.63 to 1.47 due to the increased
content of its liabilities. It is clearly reflected that the debt of the company rose constantly
whereas its equity reported a continuous decline over the years. This increases the ratio and also
the level of financial risk taken by the firm.
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Accounting for decision making 12
Conclusion
From the above report, it can be concluded that though the performance and position of Barkes
Computers has increased and improved but the company still need to focus on enhancing its
liquidity position and reducing its financial risk before offering bonus to the senior managers.
Though the profits have increased but at the same time financial obligations of the firm have also
risen during the past five years. Barkes need to increase its current assets in order to pay these
obligations before offering any kind of bonuses. So, overall it is concluded and recommended
that the company should focus on improving its performance more and should pay bonuses to the
executives later on.
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