Financial Statement Analysis Case Term Paper

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Audit Case

Overview of Current Situation'

ABC is generally in good health. The income statement shows that the company saw an increase in revenue for 2009, and this translated to an increase in net income. The company's expenses as a percentage of revenue were 13.6%, down from 15.1% the year before. COGS was 69.6% of revenue, versus 78.2% the year before. The company maintained a similar level of works-in-progress inventory over the course of the year, such that the improved operating performance did not derive from a decrease in inventory. Manufacturing overhead as a percentage of sales also declined. In essence, the improved profit performance comes from incremental improvements in cost control that had the cumulative effect of reducing the overall expenses as a percentage of revenue.

The balance sheet shows that the company's overall value has increased. The key increase here is an investment in new equipment. The value of factory equipment has increased by $42,800, and the liabilities increased in the form of a bank note of $45,000. The purchase of assets was the major use of cash, in particular factory equipment, and the issuance of the debt was the major financing activity.

All told, there are no major issues with these financial statements.

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The company has grown over the past year. This growth in revenues was met with an increase in investment in the company. The timing of that investment is not noted, but it appears that the company has not build in the increase in factory equipment into production or sales levels. If the investment came late in the year, this would make sense. There are no concerns with either the liquidity or solvency of the company, in particular given the upward trajectory of its revenues and net income at this point in time.

Continued Viability

ABC is viable at present. The investments that the company has made in growth have been incremental.. New factory equipment is allowing the company to meet the sales growth trend. Remember that 2008-2009 was a period of recession where many businesses saw declines in performance. That ABC was growing during this period is cause to be optimistic. The company's investment is not too large to be of concern -- it appears to be in line with the growth trend. Moreover, the company took out $45,000 in debt to finance its growth. That means that only around half of the new….....

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