There are various techniques which can be utilized to evaluate the information present in the financial statements of a company. Some of the commonly used techniques are horizontal analysis, vertical analysis, trend analysis and ratio analysis. All these analyses have been performed for the Competition Bikes, Inc. taking into account the income statements and the balance sheets of the company for the past three years. Horizontal analysis of the financial statements is generally done to compare the performance levels within the company for a given period of time (Weygandt, Kimmel, & Kieso, 2009, p. 647). Horizontal analysis of Competition Bikes, Inc. that has been presented in the case would facilitate comparative analysis of the amounts as well as percentage increase or decrease of each of the related items in its income statements and balance sheets (Warren, 2008, p. 306). It would thus help to identify and understand the operational weaknesses and strengths of the company. As evident from the horizontal analysis of the income statements of Competition Bikes, Inc., there has been an 81.6% decline in its net income in the year 2008 as compared to 2007 which is quite significant. This decline in net earnings of the company is mostly attributed towards the 15% decline in its net sales in 2008 as compared to 2007 because of the current economic scenario which is going through a downturn. A 15% decline in sales value implies that the cost of goods sold and the variable expenses directly related to the sales output would also decline correspondingly. This fact is evident from the 15% decline in the selling expense items like sales commissions, distribution network and transportation out. However, in spite of the reduction in sales, the utilities expenses of the company increased by $15,000 in 2008 which is around 11.1% rise when compared with the year 2007. In the year 2007, when the net sales of the company increased by 33.3%, the corresponding increase in its utilities expense was only 3.8% as compared to 2006. Hence, this is a major area of concern and a potential weakness of the company of not being able to cut down on its utility expenses even with the reduction in sales volume. However, the company managed to reduce its research and development costs by 16.3% in the year 2008. This can be regarded as one of the potential strength of the company of being able to reduce its operational costs related to its research and development activities significantly in the year 2008. As regards the general and administration costs incurred by the company, it did not manage to reduce it in spite of the decline in sales value in 2009. These facts suggest that the company management was inefficient in managing its resources effectively and efficiently to help in bringing down its operational costs significantly to compensate for the decline in sales because of the recent downturn in the economy. Next if we look at the horizontal analysis of the balance sheets of the company for the past three years, it is observable that the current assets of the company in the form of cash and cash equivalents increased by around 275.4% in 2008 as compared to the year 2007 which is quite significant. The work in process remained same for the year 2008 when compared to 2007. It is noteworthy mentioning the fact that previously the work in process inventory increased
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COMPETITION BIKE'S SUMMARY REPORT Table of Contents Table of Contents 2 Task A.1. 3 Task A.2. 8 Task A.3. 9 Task A.4. 10 References 12 Task A.1. Competition Bikes, Inc. is engaged in the business of manufacturing bicycles which are meant for professionals who use them for racing purposes…
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