ACCT100: Introduction to Accounting - JPC Company Ltd Case Study Assessment Answer
Solution Code: 1AGIC
Question:Introduction to Accounting - JPC Company Ltd Case Study Assessment
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Introduction to Accounting - JPC Company Ltd Case Study Assignment
Assignment Task:
Your group has been issued with a set of financial statements (see five year summary below). The team is required to evaluate this company’s financial health. Your team members are credit analysts within a bank, and you have been asked to evaluate, the financial stability of this company by performing Vertical, Horizontal analysis, and Ratio analysis for years, 2011-2015
At the end of your analysis, you must provide a recommendation to the National Manager in charge of Small Business Loans based in Melbourne on if you would lend this firm $1,000,000 for business expansion, at a rate of 11 percent. Can the firm afford the repayments? Additional, you should also formally advice the National Manager in charge of Small Business Loans on the limitations of relying on only financial statement analysis.
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Solution:
In the vertical analysis of Balance Sheet, the assets and liabilities are analyzed with the total assets of the company for assessing the liquidity and other important factors. In the given case, it can be observed that the percentage of cash is very low on the Balance Sheet which has further deteriorated in the subsequent years. This is a negative sign as it may adversely impact the liquidity position of the company. The satisfactory current ratio is 2 in order to ensure appropriate working capital. However, since the difference between the percentage of current assets and current liabilities is not very high the company is not maintaining the satisfactory current ratio which brings the liquidity position of the company into question. The capital mix of debt and equity that has been maintained by the company over the past 5 years is satisfactory as the percentage gap between the two has not widened for the past 5 years.
In the vertical analysis of income statement the items income and expenses are expressed as a percentage of sales. Here we can observe that even though the gross profit margin of the company has reduced over the past 5 years the net income available to common shareholders has increased. This is a positive indicator because it implies that the operations of the entity are being carried on efficiently and it has been able to reduce its indirect cost over the past 5 years. The main factor attributable behind the same is the reduction in the percentage of selling and administration expenses by the entity. The general and administrative cost ratio has also remained constant over the past 5 years which implies that the operations of the entity are being carried on smoothly.
Recommendation
Here the liquidity position of the company is not satisfactory therefore the timely payment of interest is doubtful and lending loan to the firm is not recommended. The financial states only state about the performance of the entity and there are many non-monetary factors that are not considered in financial statement analysis. Therefore, other factors should also be studied before taking a decision regarding lending loan.
Exhibit a: Vertical Analysis of Balance Sheet
Vertical Analysis of Income Statement
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