Comparative Financial Analysis of ABC and XYZ Companies

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Accounting for Business
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Introduction
In this report, the balance sheet of various firms is being studied to find out the financial
performance of the firms. ratio analysis has been carried out for the firm Big Bang Pty Ltd to
understand the liquidity position and financial solvency of this firm. A difference between
income and revenue has been explained in the report below with the example of the firm Green
Apple Ltd. A comparison has been carried out between two firms named ABC and XYZ
company to understand which firm is in a better financial position.
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Table of Contents
Introduction......................................................................................................................................2
Part A...............................................................................................................................................3
a....................................................................................................................................................3
b....................................................................................................................................................3
Part B...............................................................................................................................................4
Part C...............................................................................................................................................5
a....................................................................................................................................................5
b....................................................................................................................................................5
c....................................................................................................................................................5
Conclusion.......................................................................................................................................7
References........................................................................................................................................8
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Part A
a.
Particulars
Amount
2019
Amount
2018
net sales $630 000 $490 000
cost of goods sold 290 000 250 000
current assets 218000 222,000
quick assets 200000 210,000
current liabilities 105 000 81 000
Average accounts receivables 65000 69000
average inventory 140000 140000
calculation of ratios
current ratio 2.07 2.74
quick ratio 1.9 2.59
accounts receivable turnover
ratio 9.69 7.1
inventory turnover ratio
(Times) 2.07 1.78
inventory turnover ratio (days) 49 57
b.
The short term solvency of the business seems to be great as both the quick ratio and the current
ratio are above the ideal status. This means that the firm can pay off its current liabilities as and
when the liabilities arise. The ideal quick ratio is 1:1 and for both the years the quick ratio of this
firm is above average (Corporatefinanceinstitute, 2019). Similarly, the current ratio ideally is 2:1,
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so it is greater for both the years and thus it shows that the current ratio is above ideal and thus
firm can pay off its current creditors as and when the obligation arises.
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Part B.
Income for a firm refers to the net profit earned by a firm. When all the expenses are subtracted
from the revenue (sales) such as taxes expense, interest expense, administration expense, etc.
then the net profit/ income is arrived by the client (Corporatefinanceinstitute, 2019).
Revenue refers to the sales that a firm makes during the given year. Revenue is earned from the
core operations of a business.
For the transaction given in the question the items which qualify to be considered as income are
the interest income received from investment activity which amounts to $50 000. The discount
received from the early settlement of the liability is an income as well. The amount received
from the issue of share capital is neither an income nor revenue. The amount earned by the firm
from the updates installed by users of software is an income as the core business of the firm is to
the selling of software and not earning from the updates of the software. So, the amount earned
by the firm is also an income and not revenue from sales of software.
Revenue is earned by the firm which has arisen from the sale of software i.e. $25 000,000 is an
income for the firm as it has been earned from the core operations of the company. When a firm
earns from the major source of operations that is the business for which the firm was
fundamentally set up is the only item which qualifies to be included in the revenue section of the
business.
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Part C
a.
If both the firms apply for a loan out of ABC Company and XYZ Company then their balance
sheet needs are studied thoroughly in order to understand the position of cash and liquidity of the
firm. As a short term loan is being applied by this concerned firm the main focus is on the short
term liquidity and the short term solvency efficiency of the firm. Now, taking a look at the
current assets position of the firm ABC Company, the cash balance is $ 2400 and the total
current assets are $ 7 200. The cash position of the firm XYZ Company is 2 000 and the total
current assets of the firm are 26000. The total current liabilities of the firm XYZ Company is $
12000 and of the other firm ABC Company is 52800. Clearly, the liquidity position of the firm
XYZ Company is better as its current ratio is better than the firm ABC Company. So, the firm
XYZ Company must be given the loan.
b.
The total current assets of the firm ABC is 7200 and the total current liabilities of the firm is
$52800. The same position for the firm XYZ; i.e. the total current assets are $ 26000 and the
total current liabilities of the firm are 12000. So, the current liabilities of the firm XYZ are lesser
as compared to the firm ABC and at the same time, the total current assets of the firm XYZ are
more than the firm ABC. Concluding this, it is better for the buyer to buy the firm XYZ as it is a
more profitable deal any given day as compared to the firm ABC. So, more amount must be paid
for the firm XYZ as existing liabilities are also to be taken over along with the assets of the firm.
c.
If the existing owners agree to be accountable for all the existing liabilities, then this would
impact the decision while taking a buying decision for the firm. The total non-current asset of the
firm ABC is $ 54000 while the total non-current assets of the firm XYZ are only $
20,200(Accountingtools, 2019). The current assets of the firm ABC are $ 7200 while the current
assets of the firm XYZ are 26000. This means that the total assets of the firm ABC are 61,200
while the total assets of the firm XYZ are 46,200. As none of the existing liabilities are being
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purchased so the decision gets reversed in this case and the firm named ABC must be purchased
rather than the firm XYZ company (Accountingtools, 2019).
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Conclusion
This report has been studied in order to understand the financial positions of different firms
based on an analysis of the balance sheet and with the help of ratio analysis of the firms. The
ratio analysis carried out for the firm Big Bang Ltd. has shown that the firm has an amazing
liquidity position. For the firm Green Apple Ltd. the financial accounting shows the difference
between revenue and income of this firm which is a software firm. Also, financial analysis has
been carried out for the two firms ABC and XYZ to take various decisions for these firms.
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References
 Accountingtools. 2019. Financial statement analysis. [Online] Accountingtools Available at:
https://www.accountingtools.com/articles/2017/5/14/financial-statement-analysis [Accessed
on: 22nd May 2019]
 Corporatefinanceinstitute. 2019. What is Revenue vs Income? [Online]
Corporatefinanceinstitute Available at
https://corporatefinanceinstitute.com/resources/knowledge/accounting/revenue-vs-income/
[Accessed on: 22nd May 2019]
 Corporatefinanceinstitute. 2019. What is the Quick Ratio? [Online] Corporatefinanceinstitute
Available at: https://corporatefinanceinstitute.com/resources/knowledge/finance/quick-ratio-
definition/ [Accessed on: 22nd May 2019]
 Myaccountingcourse. 2019. Inventory Turnover Ratio. [Online] Myaccountingcourse.
Available at: https://www.myaccountingcourse.com/financial-ratios/inventory-turnover-ratio
[Accessed on: 22nd May 2019]
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