Competition Bikes, Inc. - Summary Report



Competition Bikes, Inc. - Executive Summary Report

A.1.a) Horizontal Analysis

Overview

Horizontal analysis is a direct comparative analysis of each line item across the same time period of a company. It basically reveals the fluctuation of company's accounts on yearly bases, and calculated in dollars or percentages. The formula used for calculating it is:

Dollar change = This Year's Balance - Last Year's Balance

Percent change = Dollar Change

The income statement of Competition Bikes, Inc. represents that sales of the company has increased by 33% from year 6 to year 7, however, the product cost has just increase by 31%. Where, this decrease in cost of materials is offset by high sales expense i.e. 33% as well as an increase in general operating expense, which in total is 20%. The increase in these line expenses is represented from year 6 till year 8, which has offset the profit earned due to increase in sales.

In year 7, the company has incurred higher gross profit as compared to its previous year. The main reason behind this increase is the growth in assets of a company represented by balance sheet, i.e. total assets increased by 2.9%. On the other hand, comparatively liabilities are just increased slightly, i.e. total liabilities increased by 1.2%. Thus, this is a positive indicator of growth for Competition Bikes, Inc.

A comparative analysis of company's income statement shows that the sales have decreased by 15 percent in year 8 as compared to its previous year. Similarly, the product cost and sales expense have declined by 14 and 15 percent, respectively. Where, the general operating expense just increased by 1 percent. Though sales expense as well as product cost has declined, but they were not significant enough to offset the decline occurred in sales. Consequently, net income declined dramatically by 82%.

Total revenues decreased by 15%, whereas total expenses reduced by an impressive figure i.e. 69.1%. But it was not sufficient to offset the decline in total revenues, thus net earnings before income taxes declined by 313.4% and net income reduced by 82%. On the other hand, the balance sheet shows that total assets have decreased by -0.1% with liabilities also decreasing by -1.9%, thus representing a positive sign of efficiency.

In Depth Analysis

Income Statement

In order to conduct a horizontal analysis of the company it is essential to analyze key elements included in income statement of the company throughout the years. Therefore, to analyze the financial strength of Competition Bikes, Inc., key elements of income statement are assessed on yearly basis. The analysis reveals that that company has experienced high decline in growth in year 8 from year 7, which is mainly because of the 15% decline in net sales resulting in 16.3% decline in overall gross profit. The major reason behind this decline in sales of the company is the global financial crisis occurred in 2008. However, it is anticipated that the trend of sales will remain steady for the next three years, which will facilitate the ...