Based on the company’s financial information provided, it is beyond any reasonable doubt that the company violates the solid accounting practices. The company’s accounting cycle runs for twelve months as indicated by the balance sheet, the cash flow statement and the Consolidated Statements of Income, which is typical of every company and every financial statement.
The horizontal income statement (Sheet 3) and the balance sheet (sheet 5) are prepared in accordance to the accounting cycle. However, the income statement is not highlighted for easier comprehension. In the statement, total costs and expenses are deducted from the revenues to obtain the total income from operations. Other deductions like interest are then made so as to arrive at the Income before income tax, which then translates into net income after subtracting the income tax. The balance sheet is perfectly prepared; and at a glance, it is seen to balance i.e. the sum of assets equal that of liabilities and equity. In the two statements, two financial years (2010 and 2009) are compared, with 2009 taken as the base year and the percentages increase/decrease computed with reference to 2009.
The company has computed financial ratios; however, the ratios are not sufficient for the analysis of its performance. Most of the crucial ratios are omitted. From the balance sheet, liquidity ratios are obtained. Given in the statement is the current ratio of 9.6:1 and 5.1:1 in 2010 and 2009 respectively. This shows that the company is liquid and able to settle its short-term financial obligations and thus financially healthy. Under profitability ratios, gross profit percentage (formally called gross profit margin) has been computed. The gross profit margin is 69% which shows that the company is highly profitable. Net profit margin is however, not computed, though it performs almost similar purpose as the gross profit margin. The company’s return on investment is 21%, which is positive. In measuring the leverage/gearing, none of the ratios has been computed. It is therefore not possible to tell how the company is financed by non-owners in comparison to the owners.
The company’s performance is good in terms of profitability and liquidity. However, the company should adopt a standard method of preparing its financial statements, especially the cash flow statements. The company must also compute all the ratios so that its financial position can be easily seen (Steven, 2006). For perfect analysis of the financial position, all the three ratio categories (profitability, liquidity, and leverage) must be considered.
Reference
Neely, A. (2002). Business Performance Measurement: Theory and Practice, Andy Neely editor. Cambridge University Press.
Simmons, R. (2000). Performance Measurement and Control Systems for Implementing Strategy. Prentice Hall.
Steven, M. B. (2006). Business Ratios and Formulas: A Comprehensive Guide. 2nd edition, Wiley.
Steven, M. B. (2006). Financial Analysis: A Controller's Guide. 2nd edition, Wiley.
