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Income statement indicates the profitability position of an entity which includes revenue and expenses. Generally, investors think about the profitability of an entity while making an investment. The investors should analyze the vertical and horizontal analysis of income statement. Vertical and horizontal analysis of income statement helps to make trend analysis of revenue and expenses during the period as well as of prior period. The analysis of income statement indicates the expense percentage of sales. ("Horizontal or Trend Analysis of Financial Statements - Explanation and Example | Accounting for Management", 2020)
In the given case, it is analyzed from the past 5 year’s income statements that:
The Balance sheet is commonly known as financial position of the company. It indicates the worth of business at the end of the financial year. Balance sheet includes assets and liabilities of the company. Asset is equals to sum of liabilities and equity. The strength and weakness of financial position can be analyzed through ratio analysis. Ratio Analysis. (2020).
On the basis of above analysis, it is concluded that it is not better to make investments in this company as this company is not performing well. Further, all the ratios indicate negative impacts on financial position of the company.
Cash Flow Rational – in additions to income statement and balance sheet, cash flow statement also forms part of financial statements. Cash Flow Statement is prepared by making division in three parts – firstly cash flow from operating activities, secondly cash flow from investing activities and thirdly cash flow from financial activities. Cash Flow from operating activities indicates changes in the working capital of the company and additions of non-cash items to net profit of the company. Cash flow from investing activities indicates change in cash flow due to sale or purchase of assets. Cash flow from financial activities indicates that changes in cash flow due to repayment or borrowings of loans, issue of shares, redemption of shares. Fundera.(2020).
In the given case, the company ending cash flow of each year is negative. It seems that the company is facing cash problems, the company’s cash flow at the end of 2020 is negative by $ 811951 and such negative figure has been increased to $ 3598338 in 2024. Accordingly, it is facing cash crunch over the entire period of five years. Further cash turnover of the company has been reduced to -28% from -50%. Hence it can be said that the company have liquidity problems.
It is suggested that the company can increase cash not by making capital purchase during the period of cash crunch, raise an invoice and insist for payment from customers, make delay in payment to suppliers. 9 Ways To Overcome A Cash Flow Crunch - PMG Finance. (2020)
Fundera. (2020). Retrieved 5 June 2020, from https://www.fundera.com/blog/the-ultimate-guide-to-cash-flow-analysis#:~:text=Cash%20flow%20analysis%20is%20a,have%20at%20any%20given%20time.
Horizontal or Trend Analysis of Financial Statements - Explanation and Example | Accounting for Management. (2020). Retrieved 5 June 2020, from https://www.accountingformanagement.org/horizontal-analysis-of-financial-statements/
Ratio Analysis. (2020). Retrieved 5 June 2020, from https://www.investopedia.com/terms/r/ratioanalysis.asp#:~:text=Ratio%20analysis%20is%20a%20quantitative,cornerstone%20of%20fundamental%20equity%20analysis.
9 Ways To Overcome A Cash Flow Crunch - PMG Finance. (2020). Retrieved 5 June 2020, from https://pmgfinance.com.au/2019/10/17/9-ways-to-overcome-a-cash-flow-crunch/
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