Case Analysis
This assignment gives you practice assessing the financial situation of a business. Use the
income statement and balance sheet (balance sheet is on the second page) below for this
assignment. Answer the following:
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•
What is the firm doing well (discuss three) and where are the problem areas
(discuss four)? Explain in detail with numbers from the financial statements. Don’t
just say “X increased by some” or “this number is going down”...instead, say, “X
has increased by 23%” or “X has fallen by an average of 14% each year for the last
four years.” BE SPECIFIC.
Based on the patterns you see in the years 2020 through 2023, prepare a projected
income statement for 2024 (it should simply be a new column on the far right for
2024). Again, ONLY for the projected income statement – you do not have to have
a projected balance sheet.
Strengths
Inventory Management- In the companies first year they spent $15000 and in 2023
they spent $4300. This is a 71% decrease in spending. This shows that they
found out how much inventory they need and will no longer waste money on
purchases they don’t need.
Accounts Payable- In 2020 the company had $22000 in accounts payable and by
2023 they decreased that number to $10200 which is a 53.6% reduction. In the
first year this value did increase 18% but they were able to stabilize it and
decrease it by 45 and 28 percent the next two years.
Interest Expense- The company has managed to keep their interest expense at
$1000 each year suggesting that they are paying off their debts in a timely
manner.
Weaknesses
Sales - The most obvious problem is the decrease in sales. From 2020 to 2021 sales
decreased 33.33%, the following year 21.15%, and the next 12.20%. The
company’s first year saw $78000 in sales with the most recent being a 53.8%
decrease from that at $36000.
Total Assets – Between 2020 and 2023 total assets declined 43.5%. This includes
cash, accounts receivable, and inventory, and equipment. In 2021 their assets
stood at $151000 and in 2023 they dropped to $85400.
Owner’s Capital – In the most recent two years the owner has almost entirely stopped
helping fund the company. From 2020 to 2023 this value decreased a staggering
95%. They initially invested $12000 between the first two years but in the latter 2
only $100 was used. I see this as the owner not having faith in the business
anymore.
Cash – While I did include this in total assets this number alone is notable. In the four
year span the cash balance decreased by 95%. In the first two years the company
had a combined $44000 in cash and following that they only had $3300.
Income Statement
For Year Ended
2020
2021
2022
2023
2024
Sales
LESS Cost of Goods Sold
$78,000
$40,000
$52,000
$45,000
$41,000
$38,000
$36,000
$40,000
$28000
$40000
Gross Profit
$38,000
$7,000
$3,000
($4,000)
(12000)
LESS Marketing Expenses
$3,000
$2,000
$0
$0
LESS Gn'l & Adm. Expenses
$1,000
$1,000
$1,000
$1,000
0
1000
LESS Depreciation
$10,000
$10,000
$10,000
$10,000
10000
Operating Profit
$24,000
($6,000)
($8,000)
($15,000)
(23000)
$1,000
$1,000
$1,000
1000
($7,000)
($9,000)
($16,000)
$4,000
$3,000
$2,800
(24000)
0
($11,000)
($12,000)
($18,800)
(24000)
LESS Interest Expense
Profit Before Taxes
LESS Taxes
Net Profit
$1,000
$23,000
$9,200
$13,800
Balance Sheet
For Year Ended
2020
2021
2022
2023
Cash
$24,000
$20,000
$2,000
$1,100
Accounts Receivable
$2,000
$0
$0
$0
Inventory
$15,000
$18,000
$7,000
$4,300
TOT CURRENT ASSETS
$41,000
$38,000
$9,000
$5,400
Equipment
$120,000
$120,000
$120,000
$120,000
$10,000
$20,000
$30,000
$40,000
$110,000
$100,000
$90,000
$80,000
$151,000
$138,000
$99,000
$85,400
Accounts Payable
$22,000
$26,000
$14,200
$10,200
Short-term Notes Payable
$1,200
$1,400
$700
$1,200
Long-term Debt
$125,000
$100,000
$84,000
$74,000
Owner's Capital
$2,000
$10,000
$100
$0
Retained Earnings
$800
$600
$0
$0
$151,000
$138,000
$99,000
$85,400
LESS Depreciation
Net Equipment
TOT ASSETS
(Current Assets+Equip)
DEBT
TOTAL DEBT