Reference no: EM132287670
Assessment Task
You are tasked to read carefully and analyse the presented case below and prepare a 2000 word report based on the requirements as enumerated therein.
Financial statements for a single year reflect a brief period of a company's history. It is essentially an interim analysis of a company's business activities for that year. In addition, single year analysis may not accurately reflect a company's long run performance. This is because of the possibility of unusually favorable or unfavorable economic or other conditions experienced in any particular year. Consequently, any financial statement for a single year cannot provide information on trends and changing relations that might occur over time.
To avoid the potential for misleading inferences from these factors, the companies must do the horizontal analysing in the trends and relations of corresponding items across years which can restore the comparability of these statements across time and, thereby, enhance their usefulness as tools of analysis and interpretation.
In the light of the foregoing discussion, the financial statements of ABC Ltd for 2017 and 2018 are presented below.
Profit and Loss Account for ABC ltd
|
|
2017 |
2018
|
|
|
OMR
|
OMR
|
OMR
|
OMR
|
|
Net Sales
|
|
25,500
|
|
35,000
|
|
Less: Cost of Sales
|
|
|
|
|
|
Opening Inventory
|
10,000
|
|
1,000
|
|
|
Add: Purchases
|
2 000
|
|
12.000
|
|
|
|
12,000
|
|
13,000
|
|
|
Less: Closing Inventory
|
11,0001
|
{11 000)
|
15001
|
112,5001
|
|
Gross Profit
|
|
14,500
|
|
22,500
|
|
Less Expenses :
|
|
|
|
|
|
Wages and salaries
|
250
|
|
300
|
|
|
Directors remuneration
|
100
|
|
200
|
|
|
Other expenses
|
75
|
14251____
14,075
|
50
|
15501____
21,950
|
|
Net Profit
|
|
|
|
| Balance sheet for ABC ltd |
|
2017 |
2018 |
|
OMR |
OMR |
OMR |
OMR |
| Non-current Assets |
|
|
|
|
| Equipment at cost |
6,000 |
|
7000 |
|
| Less Depreciation to date |
(6,00) |
5400 |
700 |
6300 |
| Vans |
1000 |
|
1500 |
|
| Less Depreciation to date |
100 |
900 |
150 |
1,350 |
|
|
6300 |
|
7650 |
| Current Assets |
|
|
|
|
| Inventory |
2500 |
|
7000 |
|
| Receivables |
3000 |
|
1000 |
|
| Bank |
27775 |
|
21000 |
|
|
33,275 |
|
29000 |
|
| Less Current liabilities |
|
|
|
|
| Payables |
4500 |
28775 |
2000 |
27000 |
|
|
|
|
|
|
|
35075 |
|
34650 |
| Financed by : |
|
|
|
|
| Issued share capital |
21000 |
|
12700 |
|
| Profit (all is retained) |
14075 |
|
21,950 |
|
|
|
35075 |
|
34650 |
| Market value of share |
300 |
|
350 |
|
Your report will consist of the following:
A. Introduction - discuss the process of horizontal analysis. Evaluate also its importance and limitations.
B. Body of the report contains calculations and analysis:
- Prepare a horizontal analysis of ABC Ltd financial statements. Evaluate both the liquidity and profitability ratios. Analyse the results of the analysis.
- Calculate the inventory turnover ratio and inventory turnover period for two years. Critically assess how fast can the companies replace and sell the inventory during the period.
- Calculate the Z score for each year. Assess whether the company is at risk or not.
C. Conclusion - discuss how the company balances the level of profitability and liquidity.
D. References