Case Study: Analyzing Financial Statements of Trend Ltd. - Finance

This report presents a comprehensive case study analysis of Trend Ltd.'s financial statements. It begins with an explanation of the general purpose of income statements, balance sheets, and cash flow statements, highlighting their significance for internal stakeholders and managers. The analysis then delves into Trend Ltd.'s financial performance, financial health, and cash flow management, identifying areas of concern such as decreased revenue, increased costs, and reduced liquidity. The report assesses the concerns raised by stakeholders regarding the company's financial situation, including risks associated with debt financing and market uncertainties. Finally, it offers recommendations for improving Trend Ltd.'s financial performance, such as cost minimization, expense control, and strategies to enhance liquidity and revenue.

Case study
analysis

Table of Contents
INTRODUCTION...........................................................................................................................3
PART 1............................................................................................................................................3
1. Explain general purpose of three financial statements:...........................................................3
2. Analyze the financial statements prepared by Trend Ltd........................................................5
i. Areas of concern in financial performance...........................................................................5
ii. Areas of concern in financial health....................................................................................6
iii. Areas of concern in cash flow management.......................................................................6
3. Assess the concerns raised by Priya and Sally........................................................................6
REFERENCES................................................................................................................................8

INTRODUCTION
This project report is based on case study analysis of Trend Ltd., it will cover general purpose of
financial statements and usefulness of each statements from the context of manager and internal
stakeholders. This part of project also analyses financial statements of Trend Ltd based on its
financial performance, financial health and cash flow management.
PART 1
1. Explain general purpose of three financial statements:
Income statement:
All publicly traded companies are required to issue income statements quarterly or annually.
There are three major items that complete the structure of the income statement - revenue,
expenditure and net profit. It refers to the performance of the company over a particular period of
time. In other words, it is a profit and loss account of the company.
An income statement consists of two sections - the operating section and the non-operating
section. The operating section deals with the day-to-day business activities of the company,
while the non-operating section records all revenues and expenses that are not related to the
company's regular business activities.
Purpose of Income statement:
1. Primarily, income statements are prepared for the purpose of assessing a company's financial
performance over a particular period. The performance can be submitted quarterly or
annually. Various stakeholders are interested in knowing how well the company is doing.
2. Through the income statement, the reader is able to understand how profitable the business is
and what business activities the company has undertaken. We are also able to determine the
amount of profit or loss that was generated during a particular period. If one were to keep
income statements together for several consecutive years, a trend analysis can also be done to
determine changes in revenue and expenditure items over time.

3. An income statement is used to meet the needs of different types of users. First, we discuss
the utility of the income statement for external users. The income statement is available
quarterly and annually, as noted above.
4. Potential investors will want to assess the company's performance to determine if it is worth
investing their money in the company. If the income statement shows that the company is not
profitable, then investors will not invest their money in such an enterprise (Robinson, 2020).
Uses: It can be used by Trend Ltd. to calculate profit earned during a year and classified between
expenses occurred directly or indirectly.
Balance sheet
A balance sheet is a statement that depicts the financial position of a business. It is called
because it is a sheet of all account balances related to assets and liabilities for a certain period of
time. Its purpose is to get into the true financial position of a business for a specified time, i.e.,
solvency or bankruptcy. The test balance sheet, trading and profit and loss accounts are closed
after preparation of all general accounts. The balance will show in the ledger and in the real
accounts. The balance sheet prepared thus shows the balance of the classified list
(Subramanyam, 2009).
Purpose of balance sheet:
The purpose behind the activity report is to find out the financial position of a company at a
given point of time. News shows the quantity of an item (resources) and its amount (liabilities),
just as the amount of resources has contributed to the business (value). This data gradually
becomes important when accounting reports are collected for certain back periods, aiming to be
able to see the model in certain detail.
Uses: It is being used by Trend Ltd. to know financial position of the company; additional to this
it also helps in knowing the financial position of the firm (Fridson and Alvarez, 2011).
Cash flow statement
Also known as cash control, you should include charts of accounts, records of releases, accounts
payable, accounts receivable, charts and reports. Throughout the post we will see how to build

your cash flow in practice, but before that, let's understand its main concept. It sounds simple,
but thinks about the scenario that most companies usually face. Most accounts mature on day 5
of each month, while sales are made throughout the month. Cash is a clear match (Foster, 1986).
Purpose of cash flow statement:
The purpose of preparing a cash flow statement is to look at the source of cash and usage of cash
of the company during a specified time period. Cash flow statements are traditionally considered
less important than income statements and balance sheets, but can be used to understand a
company's performance trends that cannot be understood through the other two financial
statements. While the statement of cash flows is considered the third most important of the three
financial statements, investors find the statement of cash flow to be the most transparent, so they
rely more on it than other financial statements to make investment decisions.
The statement of cash flow is divided into three categories: cash flow from operating activities,
cash flow from investment activities and cash flow from financial activities. Operating activities
include revenue generating activities of the company. Examples of operating activities include
sales of products or services as well as paid operating expenses such as salaries, wages, rent and
transportation such as cash (Penman, 2013).
Investment activities include payments made to purchase long-term assets, cash received from
the sale of long-term assets. Examples of investment activities are the purchase or sale of a fixed
asset or asset, plant and equipment, and those issued by another entity. Purchase or sale of
security carried.
Uses: It is used by Trend Ltd. to know liquidity of the business and to determine where the cash
has been utilized.
2. Analyze the financial statements prepared by Trend Ltd
i. Areas of concern in financial performance
As compared to previous year’s sales revenue which is 2018; current year performance is down
by 1,700k pounds. Where cost of goods sold has been increased by 231K pounds, which again
indicates failure of company to manage variable costs with sales revenue or it can be said that
variable cost of the company has been increased. Due to less revenue and more costs as

compared to 2018; Trend Ltd’s gross profit and net profit is decreased and underperformed by
the company during the year.
ii. Areas of concern in financial health
Despite Trends Ltd. has underperformed in context of net earnings during the year but its
financial health become strong compared to previous year. Trend’s total assets have been
increased from 2,447k pounds to 3,107k pounds which shows approx. 27% increment in
noncurrent assets from 2018. On the other hand; company’s total current assets have also been
increased by 17% and current liabilities by 30%; this indicates that current ratio of company is
reduced in 2019. This could indication of increasing in the risk of default by company. All over,
financial health of the company is improved compared to 2018 report.
iii. Areas of concern in cash flow management
In 2019, closing balance is much less than 2018, which indicates less liquidity compared to
previous year. This is due to cash used in operating activities and investing activities. To meet
this cash outs; Trend Ltd. has borrowed money by paying 72k pounds interest on it. The current
investment is not performing well as compared to previous year; as interest received is decreased
from 40 to 15k pounds, despite increasing in investment.
3. Assess the concerns raised by Priya and Sally
Priya and Sally’s family concerned about decrease in net profit during the year and also have fear
for uncertainty in market and changes in government policies. Taking loan in exchange of paying
72k pounds as a interest money could be risky for current situations; as there is inconsistency in
market trend, government policy and fashion industry. Any decrease in demand could affect
company’s revenue and net profit. This will lead to increase the risk of insolvency by business to
pay interest. In this current situation; the best option for raising money could be equity compared
to debt. But still it can take number of steps to improve financial performance of the company
discuss below:
 Through minimizing variable cost per unit of the production.
 To take measures to decrease the operating expenses.
 Making budgets like rolling and annual budgeting to track control and monitor the
expenses.

 Focus on increasing the liquidity of the activities to gain more cash to invest in expansion
of the business and enhancing sales revenue through marketing and advertisement.
 Either sales needs to be increased or expenses need to be minimized to improve financial
performance of the company (Ou and Penman, 1989).

REFERENCES
Books and Journals
Foster, G., 1986. Financial Statement Analysis, 2/e. Pearson Education India.
Fridson, M.S. and Alvarez, F., 2011. Financial statement analysis: a practitioner's guide (Vol.
597). John Wiley & Sons.
Ou, J.A. and Penman, S.H., 1989. Financial statement analysis and the prediction of stock
returns. Journal of accounting and economics, 11(4), pp.295-329.
Penman, S.H., 2013. Financial statement analysis and security valuation. McGraw-Hill.
Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.
Subramanyam, K.R., 2009. Financial statement analysis. Includes index.