Financial Analysis of the Wonderland-Free-Samples for Students

Question: Discuss about the Financial Analysis of the Wonderland Construction Supplies. Answer: Introduction The financial statements of any company help in ascertaining the financial position and the financial performance of the company. In the given case, the financial statements of the Wonderland Construction Supplies have been discussed and analysed for the year ending 30th of June 2017. At first, the financial statements have been discussed with regard to the balances of each and its respective relation to other item. Secondly, the accounting ratios including the current ratio and others have been calculated and discussed and compared with the competitors. Thirdly, the method adopted for the calculation of the depreciation and methods thereof have been discussed along with the advantages and disadvantages. Similarly in the fourth section, inventory valuation methods have been detailed and its likely impact on the financial statements. At the end the internal control measures have been listed and detailed. The report has then ended up with the appropriate conclusion summarizing the whol e study. financial Analysis financial Statements The financial statement consists of three major statements balance sheet, income statement and the statement showing changes in equity (Kothari and Ball, 2014). The balance sheet of the company depicts that the company has the net assets of $62420 and has zero noncurrent liabilities. The income statement of the company depicts that the company has incurred the net loss of $5580 for the period ending 30th of June 2017 and has gross profit of $20664. The equity movement statement shows that the no additions have been made in the equity. Only deductions have been made as drawings and loss (Subramanyam and Wild, 2009). FINANCIAL STATEMENTS Income Statement 1st July 2016 to 30th June 2017 $ REVENUE: Sales Revenue $ 69,120.00 Discount Received $ 500.00 Total Revenue $ 69,620.00 Cost of Goods Sold $ 48,956.00 Gross Profit $ 20,664.00 EXPENSES: Advertising Expense $ 1,500.00 Bad Debts expense $ 116.00 Dep - Furniture $ 1,836.00 Discount Allowed Expense $ 940.00 Wages Expense $ 5,152.00 Supplies Expense $ 365.00 Inventory Loss $ 680.00 Rent Expense $ 13,200.00 Insurance Expense $ 2,455.00 TOTAL EXPENSES $ 26,244.00 Net Profit or Loss -$ 5,580.00 Balance Sheet as at 30th June 2017 $ Current Assets: Cash at Bank $ 61,442.00 Accounts Receivable $ 2,321.00 Provision for Doubtful Debts -$ 116.00 $ 2,205.00 Supplies $ 155.00 Inventory $ 8,404.00 Prepaid Insurance $ 818.00 Prepaid rent $ - GST Paid $ 8,144.91 Total Current Assets $ 81,168.91 Non-current Assets: Furniture at cost $ 6,119.09 Less : Accumulated Depreciation -$ 1,836.00 $ 4,283.09 Total Non-current Assets $ 4,283.09 Total Assets $ 85,452.00 Current Liabilities: Accounts Payable $ 13,844.00 GST Collected $ 6,912.00 PAYG Tax Payable $ 312.00 Wages Payable $ 1,964.00 Total Current Liabilities $ 23,032.00 Non-current Liabilities: Total Non-current Liabilities $ - Total Liabilities $ 23,032.00 NET ASSETS $ 62,420.00 Owners' Equity: A Wonderland, Capital $ 62,420.00 Total Owners' Equity $ 62,420.00 Equity Statement 30th June 2017 $ Beginning Equity add Capital contributions $ 70,000.00 Less: Drawings -$ 2,000.00 Less: Loss -$ 5,580.00 Ending Equity $ 62,420.00 Financial Ratios Current Ratio The current ratio is calculated by dividing the current assets by the current liabilities. As per the industry norms, the minimum current ratio shall be 1.30 to 1.50. As the company has the current ratio of 3.52, which depicts that the company has the high liquidity position (Deakin, 2016). On comparing the current ratio with that of the competitors operating in the same industry, the company is in the good position. The competitors level for the current ratio is 1.50 to 2.70 but the company has crossed the maximum level and thus the company has the high liquidity position. Gross Profit Ratio The gross profit ratio is calculated by dividing the gross profit figure by the sales revenue figure. Higher the gross profit, higher is the trade margin that the company earns. In the given case, the company has earned the gross profit of 29.90 % (Watson, Shrives and Marston, 2002). The competitors level of gross profit is between the 38% and 43%. The company has not even crossed the minimum level and thus is not operating the functions in good manner. S. No Particulars Amount ($) Ratios 1 Current Ratio Current Assets $ 81,168.91 Current Liabilities $ 23,032.00 3.52 2 Gross Profit Ratio Gross Profit $ 20,664.00 Sales Revenue $ 69,120.00 29.90 Depreciation There are two methods available for depreciating the assets. One is straight line method and second is reducing balance method. Under the straight line method, the equal amount of depreciation is charged over the useful life of the asset whereas in the latter method, the depreciation is charged on the closing balance at the specified percentage. The major difference is that the net carrying amount under former method will be zero but in the latter method it can never be equal to zero. Inventory The other method of inventory valuation is the First in First out (FIFO). It measures the closing stock at the value of the recent purchase price of the item and thus will have the value of inventory depending upon the market conditions. Internal Control Mechanisms The company shall put in place the system for the following: The valuation of the inventory and the physical verification on the periodical basis. Daily update on the cash and bank position Reconciliation of the bank balance on daily basis. Proper calculation of the depreciation, etc. Conclusion To conclude the report, each item of the financial statements plays the very important role in the functioning of the company. The company shall manage all its working in such manner that the results shall be in parlance with the market conditions and the results quoted by the competitors. It is recommended to put in place the system which can manage and reduce the risk of any discrepancies. List Of References Deakin, E.B.,(2016), Distributions of financial accounting ratios: some empirical evidenceThe Accounting Review,51(1), pp.90-96. Kothari, S.P. and Ball, R., (2014), Financial statement analysis, Mcgrew-Hill Companies. Subramanyam, K.R. and Wild, J.J.,( 2009),Financial statement analysis. McGraw-Hill. Watson, A., Shrives, P. and Marston, C., (2002), Voluntary disclosure of accounting ratios in the UK, The British Accounting Review,34(4), pp.289-313.