Running head: SUMMARY REPORT
Competition Bikes
Inc.
TASK 1
Reginald Edrington
8/28/2013
SUMMARY REPORT
1
Table of Contents
Horizontal, Vertical, Trend and Ratio Analysis.............................................................................. 3
Horizontal analysis.......................................................................................................................... 3
Income statement......................................................................................................................... 4
Revenue section .................................................................................................................................... 4
Operation Expenses .............................................................................................................................. 4
Selling expenses .................................................................................................................................... 4
General and Administrative Expenses .................................................................................................. 5
Balance Sheet .............................................................................................................................. 5
Cash and cash equivalent ...................................................................................................................... 5
Account receivable................................................................................................................................ 5
Total Current Asset ............................................................................................................................... 6
Notes payable and account .................................................................................................................... 6
Stockholder’s Equity ............................................................................................................................. 6
Vertical analysis .............................................................................................................................. 6
Income statement......................................................................................................................... 7
Revenue................................................................................................................................................. 7
Selling expenses .................................................................................................................................... 7
General administrative cost ................................................................................................................... 7
Operating income, EBIT and Net Earning ............................................................................................ 7
Balance sheet ............................................................................................................................. 10
Cash and cash equivalent –strength .................................................................................................... 10
Account receivable –weakness ........................................................................................................... 10
Current Liabilities – strength .............................................................................................................. 10
Total Current Liabilities- Strength ...................................................................................................... 10
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Raw Materials Inventory and work in progress Inventory- weakness ................................................ 10
Trend analysis ............................................................................................................................... 11
Ratio Analysis ............................................................................................................................... 12
Current Ratio-Strength .............................................................................................................. 15
Acid Test Ratio- strength .......................................................................................................... 15
Collection period ....................................................................................................................... 16
Gross profit margin –strength ................................................................................................... 16
Working capital ............................................................................................................................. 16
Current working capital state .................................................................................................... 16
Improving working capital ........................................................................................................ 17
Internal controls ............................................................................................................................ 17
Corrective action ....................................................................................................................... 20
Risk of weakness ....................................................................................................................... 21
Sarbanes-Oxley ............................................................................................................................. 22
Sox compliance ......................................................................................................................... 22
Good requisition.................................................................................................................................. 23
Purchasing ........................................................................................................................................... 23
Receiving ............................................................................................................................................ 23
Transaction documentation ................................................................................................................. 23
Bibliography ................................................................................................................................. 25
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Horizontal, Vertical, Trend and Ratio Analysis
The evaluations of the financial health of Competition Bikes, Inc. (CB) are resultant
using the attached income statements and balance sheets. It is focusing on FY 6, FY7 and FY8 to
measure the growth and stability of this firm.
The period between the FY 6 and FY7, Competition Bikes, Inc. had a significant growth
in new earnings that was not extended on into FY 8. Transfer of positive net profit of 313.4 % to
a huge loss of 81.6%.
Horizontal analysis
This is an analysis techniques used on financial statement to show the changes in the
number of matching financial statement items for a period. It is essential in evaluating trend
situations. Horizontal analysis uses financial statement for two periods or more. The base
period is usually the earliest period and items on all financial statement for the period that
follows are compared to the items on the base period financial statement.
Importance of
horizontal analysis is that it aids in identifying performance issues and allows for trends
detection. Having the background information is essential to avoid drawing conclusion on the
analysis itself because this can be misleading without any context.
CB reduced the accounts receivable account by 15 %. The horizontal analysis of the
current assets displays that the assets have grown 16.5% from FY7 to FY8. The outcome of
collecting on accounts receivable was an infusion of $ 107,640 dollars. The cash balance
ornament 275.4%. Analysis displays that the accrued devaluation was reduced by $ 230,000 or
50%. The total assets were reduced by 0.1% or $2, 400.
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Income statement
Revenue section
In the income statement strength is the clearest change of growth observable in the net
sale difference from the FY9 to FY10 of up to 1%. This is very substantial for the company and
indicates strength or positive results. in addition to this, another strength is seen in the sale of
goods which is proportional to cost incurred in purchase of goods here the marginal difference
between the financial year 2009 and 2010 is 1% . This indicates raise and fall of cost of goods
versus sales from this information we can deduce that profit can be increased by reducing the
cost of goods.
Operation Expenses
The operational expenses seen a 3.6% drop. This drop was not equivalent to the reduction
in income. Management must retain expenses related to sales income. If they had kept in line the
operational expenses would have dropped in lieu of increased. There are rare areas of anxiety
within this area that must be addressed.
Selling expenses
An increase in advertising is meant to mark a strength in the company, this because an
increase in the advertisement means that the company brand is recognized widely and its
visibility broadened. However, there was a decrease in advertising of 8.3% from the FY9 to
FY10 this indicate a weakness. Since the company deals with sales, its sales are affected by
decline in advertisement since the customers will not be able to know when a new commodity
hits the market. Thus, I recommend that more funds to be directed towards advertising. Strength
here is seen through the fact that there was a fluctuation of the accounts up and down
proportionally to the net sale, which shows good management in selling expense.
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General and Administrative Expenses
Administrative and general expense in the financial income statement is the most crucial
source of concern. An important strength in this case is the decline in expenses of 3.5% from the
FY9 to FY10. This means that the company has finer control especially when the sales are
trending downward. In addition to this across all the years the other general expenses are
constant this means that there is no need to review the accounts for content nor make any
consideration for reduction of expense it actually should be left as it is since it is proportional to
the sales. When it comes to controlling expenses for both general and administrative, the
operating income and total Operating expenses shows strength of the company. Thus, due to the
company exercising better control the company G& A expenses fell by 3.5% from FY10 to FY
11.
Balance Sheet
Cash and cash equivalent
There was strength in this area due to an increase of 275.3% in cash from FY7 to FY8 in
spite of the decline in net sales.
Account receivable
A weakness is seen due to the substantial increments from FY6 to FY7 of 164.3 this show that
the company is inefficient in collecting the outstanding accounts. Thus, the company ought to
increase its efforts of collecting outstanding account by maintaining communication with its
customers.
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Strength is observed in the company from FY7 to FY8 of 17.7% this means that the company has
improved its collection of outstanding account.
Total Current Asset
Here strength is observed due to the increase in total assets by 16.5% from FY7 to FY8,
this can be credited to improvement in the collection of outstanding accounts.
Notes payable and account
The growth of current assets is by far greater than the liabilities growth which indicates
strength. The positive trend of increase of payable accounts across all the year shows that the
company is able to leverage and use its debts in financing its assets.
Stockholder’s Equity
Strength here is seen through an increase in stockholder equity, which means that current
investors gains high dividend which adds value to the company stock thus making it more
attractive to investors. Additionally, increase of the retained earnings means that will not have to
give out stock in order to raise capital for operations.
Vertical analysis
Vertical analysis describes the representation of equities, liabilities and assets as a
percentage that represents the whole. The three are added up from the balance sheet each of
them is expressed in percentage and as representative of the total. Vertical analysis is most
appropriate when comparing different sized companies and makes it easy for the observer to
determine the company that have high percentage of liabilities compared to equity, or more
assets compared to equity and liabilities. Vertical analysis focuses mainly on money distribution
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over certain duration of time. Thus it enables the company in knowing how money is spent
within a certain period of time.
Income statement
Revenue
Strength here is shown through the fact that the cost of goods for three continuous years has
remained constant
Selling expenses
The selling expenses are constant over the years, which is strength since it shows that the
company is able to carry out its sales efficiently, transportation and distribution efficiently.
Administrative and general expenses weakness this is because 18.4% of each net sale was spent
on A&G expenses this expense is far much higher than the previous two years.
General administrative cost
This contains the biggest concern in the company. The company incurs 18.4 cents every
sale for general expenses and administrative expenses in the FY7 and FY8 this kind of expenses
should be controlled furthermore the company should introduce quarterly budget in order to
review expenses constantly.
Operating income, EBIT and Net Earning
For FY6,FY7 and FY8 all the above show a trend going downward this can be attributed
to the high cost the company incurs for general and administrative expenses. However, after the
implementation of expense control these changes and the company starts having an increase in
operating income, earnings before income tax and net earnings.
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Gross sales profit is a gauge of the firm’s profit on all goods sold. The meaning of this
number is maintaining market share and the feasibility of the product. Gross sales allow for a
cash influx to maintain operations. An analysis identifies weaknesses to deliberate latent
preparations desirable to raise the gross profit ratio.
The gross profit is straggling down. This is after a record FY7. This creates anxiety,
mainly when compared to FY6 when the gross profit was 26.6%. A gross profit of 27% is
measured a nice sensible profit. CB needs to pay specific care to this decrease. A decrease in
gross profit is a decrease in market share, cash flow and will affect CB’s net earnings. This
decrease will affect the ability to generate cash reserves.
Assets for FY6 are 24.5 cents out of every dollar and total liabilities are 47.5%, and for
FY7 were increased to 31.9 cents. This was possible by the accounts receivable increasing from
6.5% to 16.6%. Liabilities declined to 46.7%.
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As you see in the above table, the financial statements demonstration that operating
expenses are 25.1% of every dollar made by CB. These expenses include sales expenses, general
and administration expenses.
General and administration expenses augmented gradually. Precisely, there was upsurge
in the cost of general and administration expenses from 15.5% to 18.4%. One distinguished
cause for this upsurge was that salaries were increased in FY8.
Executive Commissions increased from FY7 to FY8. Sales income needs to be
unswervingly associated to sales profits. This may be a gauge of CB not being in financially
good health in the near future. If their salary was unswervingly linked to their net profit, then the
percentage would have stayed steadier.
The cost of general and administration expenses ornament in FY8 by $12,000 or 0.7%.
This Figure is an extra pointer that the financial health of CB is deteriorating.
These ratios should be of major anxiety to CB. They are breaking even between sales and
expenses. This slight margin is revealing that expenses are too high. The 2.6% reduction in net
earnings is below their preceding FY6 net earnings.
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Balance sheet
Cash and cash equivalent –strength
In FY8 the company had 10.3% of cash making up the assets. The advantage of having
cash is the company is able improves its credit and liquidity capabilities. This strength can be
accredited to gatherings of strong sales in FY7 and to good collection activity for FY8.
Account receivable –weakness
There is high amount of receivable account, which makes up assets meaning that every
dollar making up the asset is owed by the company through receivables. A total 16.6 cents in
year 7 and 14.1 cents of every plus dollar is owed to firm through it receivables. The amount is
not too high but it can be improved.
Current Liabilities – strength
The most of the firm’s liabilities are made up for long term possessions (building,
landing, equipment). That will help the firm maintain very good liquidity ratio and assistances to
gain favorable credit and financing terms with vendors and lenders.
Total Current Liabilities- Strength
It is trending down from 47.5% for FY6 to 46.7% for FY7 and 45.9% for FY8.This is
principally due the circumstance that the mortgage payment is releasing more debt than the firm
is suffering it through payables.
Raw Materials Inventory and work in progress Inventory- weakness
1- Though the firm does not preserve any finished product in its inventory.
2- It does need to purchase and inventory raw materials for production.
A weakness can be observed in:
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
High amounts of raw materials 2.1% for FY7 and FY8

Work in progress inventory 3% for FY7 and FY8
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Recommended to review of the purchasing and inventory areas so current material levels are
anticipated in future material purchase. This will lead to lower inventory levels and upsurge the
bottom line.
Trend analysis
The trend analysis given has a weakness because there is no pattern of Net Earnings and
Net sale for FY6, FY7, and FY8. In addition, the projections fails to reflect the company past
performance the cause of decrease is the high expenses cost. The company can resolve this by
increasing funding and reviewing sales projection.
In the spite of the fact that the business had sales drop at FY8, the business was talented
to increase sales by 33.3% among FY6 to FY7. In order to increase the firm's profits;

The management must have to recover IT operations.

The business must cut costs to be able to uphold their profits.

The company must assess its current responsibilities to ensure that the debt ratio
in proportion to their revenue (Graham, 2004).

The business must assess its production, advertising and processes departments to
ensure that they are effectively carrying out their business.
If the overhead issues are considered and addressed, the business will likely recover and
be able to work effectively which eventually increase sales and gross profit. Analysis of trends in
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percentages shows that the company is in FY9, FY10, and FY11 will be capable to encounter its
business objectives and preserve a profit.
Following trend analysis was completed to assess CB net sales profits for FY8, FY7, and FY6:
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In above table, when we compared the Net Sales between FY8 and FY7, we found that the Net
sales decreased in FY8.
Sales should endure to growth annually, to establish the stability of the firm and the viability of
the product.
Compared Cost of Goods Sold - In FY 8, the Cost of Goods declined compared to FY7.
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For FY8, the trend shows that the cost of goods is decreased but is not in line with the decrease
in sales. The Cost of Goods requests to be assessed to assure that the proper pricing of the goods
is in line with the sales point of the merchandise.
In EBIT and net earnings, FY7 delivered the trend boost with a 413.4% rise in growth. This was
due to the wonderful growth in sales. In FY8, EBIT and Net Earnings were melodramatically
abridged even below FY6. This is of major concern. Although sales were decreased, operating
expenses were not decreased to produce a better EBIT and net earnings.
Decrease in expenses should have been made during the year as the decrease in sales was
identified.
The trend analysis for FY8, compared to FY 7. Policy change may be required when sales are
reducing and expenses are growing. This simple business fact produces a strong EBIT and net
earnings bonus.
Trend analysis for future years, FY11, FY10, FY9, and FY8
The trend % is 100% for FY6 (it is base year), for FY7 is 133.3%, and for FY8 is 113%,
although lower than FY7, but it is still higher than FY6.
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This trend analysis shows sales in FY8 were 13.3% of FY6 sales. This characterizes
growth in balance over a three year period. The outcomes are a favorable impact to the firm. The
trend is less favorable in the next three years. From FY8 to FY11, the trend analysis is only an
11.8% growth in sales. This is lower than the previous three-year period.
This would still be a favorable impact for CB. The firm will recover from its FY8
losses. They need to be aware and pay attention to their operating expenses to assure
profitability.
Ratio Analysis
This is a form analysis for financial statement used in obtaining the performance of a firm
financially in quick way. Ratios are classified into short-term solvency, Asset Management,
Profitability, Market value and Debt Management Ratios.
Ratio analysis is important for
evaluating performance, creditworthiness, debt, payment performance, collection performance
and inventory efficiency.
Current Ratio-Strength
In the FY8 the current ratio was 5.35 which mean that the company current asset for each
dollar of liabilities was $5.35 which is strength. In addition to this ratio also shows that the
company can increase its assets in its operations and manage to maintain a significant current
ratio.
Acid Test Ratio- strength
The current acid test ratio is 4.25 this is higher than the norm manufacturing ratio of 1.0
which means that it is a company strength. This ratio is paramount in aiding the company in
finances and investment.
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Collection period
This is a weakness because the company is slow in collection of accounts. The company
average collection period is 43.8 day while the competitor is only 32.5 meaning that the
company should improve its collection period.
Debt Ratio- strength this is strength because it is way below the normal figure of 57-67.
The company only has a debt ratio of 45.9% which means that it has more room for using debts
to finance its operations.
Gross profit margin –strength
The gross profit margin is constant at 27% (FY8) and compared to competitors which are
32.1% in the same period we can say that it is strength. Because the company can still increase
commodity prices and still remain competitive.
Working capital
Current working capital state
Working capital is composed of current assets deduct current liabilities and it resemble
available for generating revenue and conducting the business. From the table we can deduce that
the company does meet the terms of collection of the outstanding accounts, which is a weakness.
To improve working capital the company can amend and renegotiate the working terms with
suppliers.
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The company working capital is above 1.5 million from the year FY6 there is an upward
growth in the working capital and cash in hand. This is because the company has implemented
new measures that ensure that customers pay their debts on time. It takes the customer an
approximate 46.7 days to settle their debts.
Improving working capital
This can be done by revising better terms with the suppliers. The company can also
improve working capital by improving its method of collecting outstanding accounts. The
company should also revise the terms of credit for client who fails to pay as agreed whereby they
should be charged higher.
Internal controls
Internal controls are the organizational plan and all the related measures to:
-
Safeguard Assets
-
Encourage employees to follow company policy
-
Promote operational efficiency
-
Ensure accurate, reliable accounting records.
Internal controls are very important for a company. Companies need to find a process and
plan that will work best for their company.
By taking a quick look at the purchasing system it seems to separate all the different
departments to insure all the right policies are followed. I would recommend the following
changes in the process.
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The purchasing department will issue a purchase order to the supplier based on the
monthly budget projections. It is not listed where the budgeting projections came from. This
needs to be identified, so everyone knows who is in charge of the projections. It should also be
listed in the process exactly what suppliers the order will be forwarded to. You do not want to
leave it up to purchasing department.
Purchasing checks with three sources for similar quality materials and selects the low
bidder from the three. There needs to be a check in place to verify that three bids were accepted,
and the lowest one was take. Without this check there is no way to tell if the lowest bidder got
the order. There also needs to be an explanation of the bidding process. Does the purchasing
department just pick three suppliers? Is there a list? This needs to be explained.
The purchase order is sent to the supplier by the purchasing department on the 1st of
projected month. There needs to be verification the lowest bid was accepted. The purchase order
also needs to be verified by someone. This is to make sure the right amount was ordered.
Upon receipt of the goods they will be brought to the production line for use during the
month. This does not explain how they were received. Did someone verify the amount?
Someone needs to check the order for accuracy. The items received needs to be checked against
the items that were ordered. This way you know you are paying for.
Any unused parts are sent to the raw materials inventory stores on the last day of the
month. There needs to be a check against the inventory that was used, and the inventory that is
being sent to the inventory stores. This should be done to make sure no inventory is getting lost
or stolen. The company also needs to look into why there is extra inventory being ordered. You
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want to try to order just enough inventories for the month. Is should also be explained where the
inventory stores are, also what they are.
Purchasing sends the suppliers invoice to according and accounting writes a check to pay
the invoice. The accounting department needs to have a check done to verify the checks are
being sent out, and that the checks were sent out for the right amount.
The purchasing department ought to requisition form to pay for purchases. This will play
a great role in avoiding possible fraud.
Separation of duties generates checks and balances system. This greatly decreases the
ability to misappropriate items from the company. The internal controls state that the purchasing
department will issue the purchase order. The spending of firm funds is under inspection by
auditors and is resultant in misinformation about the firm’s financial strength. The prevention of
theft and fraud is supreme in an assembly firm.
The audit shows the purchase order system as maybe the single largest problem in the
firm. Many individuals can access the system and produce a payment. The firm is weak to untold
losses. Problem, the purchasing department controls the selection of vendors, purchasing
materials and the receiving of materials. This system only affects to the budgeted transactions.
The purchase agent authorizes to purchase and issues the purchase order based on budgeted
amounts. There is not a solid policy to protect or assure the receipt of goods authorized in the
purchase order. The end effect is goods being received that were not ordered or required.
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Corrective action
The person in charge of the budget ought to give a request for purchase using a form for
requisition in order to make purchases for materials in accordance to the drafted budget.
CB to be compliant with SOX needs to implement the following:

Establish processes and policies to an independent or management review of the three
sources who are bidding for the vendor supplier work, to discourage the favoritism of one
of three sources.

Establish a separate entity for the physical writing of the purchase order.

Implement policies for accurate confirmation of the invoice and the goods. Establish
policies to insure that the goods ordered were delivered. Appropriate payment of the
invoice.
In more details, CB needs to have a process that includes inventory control and verification of
every step to make sure their plan is used to its fullest. I will list the steps that should be taken to
make sure this happens.
a) There should be requirement to come up with how many suppliers are needed to be
ordered. The inventory should be compared to the planned production, and what is on
hand from the previous month. The request should be created after this is done. The
production manager should approve this order then send it purchasing.
b) There should be a list of suppliers that are too be used by the purchasing department. The
purchasing department should then submit the purchase order to these suppliers. A
different employee should then take those bids, and review them. The purchasing
manager should also review the bids, and pick the best one.
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c) The purchasing manager should then submit the purchase order to the chosen vendor at
the 1st of the month.
d) When the suppliers are received they should be checked against the purchasing order.
While this is being done the inventory should be entered into the inventory system. If
there are any issues there should be taken care of at this time.
e) As suppliers are being used in production they should be entered into the inventory
system.
f) At the end of the month the inventory that is left over should be compared to the
inventory system to make sure everything is accurate.
g) The suppliers then need to be documented as left over, so then they can be accounted for
when ordering supplies for the next month.
h) The accounting department should be sure all the appropriate steps were followed. They
should also make sure that all required documents are accounted for. Payment should
then be prepared. The accounting manager should verify the payment was made, and the
appropriate amount was paid.
Risk of weakness
The risk that can result from these purchases is fraud and unauthorized purchases
The risk can be mitigated by implementing a process for purchasing in order to ensure the
purchasing department only gives authorization for purchases.
Financial
The purchasing from a non-qualified resource.

The receiving of unapproved goods.
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Delivery of unnecessary goods in conflict with the Just-In-Time strategy, the receipt of goods
that are not timely delivered causing assembly delays.
Risk Mitigation
Buying from a non-qualified source, the requirement to implement policy on review of three bids
that include an independent review of the source bids in relation to compliance and
independence from resource
Implement management approval and review of all selections of potential sources to insure
policy compliance and to eliminate the potential for purchases being aligned with internal
resources.
Implement policy concerning the receiving of unapproved goods and receipt of all goods.
Implement policy and process concerning appropriate receipt of goods so that goods are received
according to scheduled purchases. Fraudulent invoices being paid would be eliminated if the
process has several checks and balances.
Sarbanes-Oxley
This was an act created in the year 2002 with an aim of ensuring accurate financial
information is reported by public companies.
Sox compliance
The fact that the purchasing department makes purchases from the budget means that the
internal control is deficient and fails to comply with SOX. Thus for the company to claim that
its internal control are sufficient it must first comply fully with SOX requirement.
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This the company can achieve by allowing the purchasing department to receive requisition.
Additionally the company ought to issue documented transactions.
Correction Action Sox compliance should address the following in internal controls
Good requisition
There is a need for the company to set up a requisition system that ensure that only the person
with the budget authority makes request for the goods needed
Purchasing
The department for purchasing should be the only one with authority to issue purchase orders,
and ought to avoid invoicing, requisitioning or receiving.
Receiving
There is a need for the company to put up a receiving system, which checks on received
merchandise, and give report to purchasing, accounting, and requisitioning party.
Transaction documentation
The company ought to issue out forms which are numbered and showing all purchasing,
requisitioning, payment and receiving process in order to ensure that all accounting transactions
are properly traced
Noncompliance Actions
Material Weakness
There have been several Material weaknesses in CB financial statement;
1. Shortage of internal controls in violation of SOX “establishing and maintaining adequate
internal control over financial reporting” (SEC, 2003);
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2. With disappeared inventory, an assessment of its liquidity is overstated. “Issued an attestation
report on management's assessment of the company's internal control over financial reporting”
(SEC, 2003).
Recommendations for corrective actions for noncompliant with the Sarbanes-Oxley requirement
Sox Section 404 – Contract an independent auditor to assess Competition Bikes Inc., internal
controls.
Sox Section 906 – Strict requirements of adherence of corporate responsibility for financial
reports.
The directive states that “Management is responsible for ensuring the internal control Processes
to prevent material misstatements from being reported in the financial statements” but does not
report on the precise internal controls over the financial reporting nor identify the framework
that was used to assure and assess the internal controls.
The letter does not provide details in its valuation that internal controls are effective. Simply
stating that it is effective based on the COSO is not enough since COSO Internal ControlIntegrated Framework states that “material weakness is considered in relation to an entity’s
financial reporting objective…” (COSO, 2011)
In Summary of: non-compliance corrective actions. A check and balance of all purchase
orders and received goods would lighten the common of compliance and profitability concerns.
A thorough implementation of Just- In –Time strategy for raw materials would move CB into a
more profitable venture.
SUMMARY REPORT
Bibliography
Alan A. Bevan & Jo Danbolt, (2000). Capital structure and its determinants in the United
Kingdom: a decomposition analysis. Working Paper University of Glasgow. 
Bancel, F. & Mittoo, U. (2002). The determinants of capital structure choice: A survey of
European firms.Working paper series, SSRN. 
COSO. (2011 Dec). Internal Control – Integrated Framework. Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Retrieved from
http://www.ic.coso.org/download.aspx
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