After reviewing the P&L Sheet, the Balance Sheet and the Cash Flow documents for News Generation for the 2005 year, I noticed some things that may be a red flag for any business to address. These items include some questionable spending amounts in certain areas of the business. There was also the wrong Net Income amount transferred over to the Balance Sheet.
On the P&L I noticed several cost to the business that seems to be very expensive. For instance, on the Cost of Goods there is the Teleconferencing charge of $15,322.49, which seems very expensive to me. I would hope that News Generation could search around and find a better deal on teleconferencing which would have a positive effect on the Bottom Line. Another concern would be the charge of $23,321.00 for Health Insurance. Maybe this price could be reduced if there is a ...view middle of the document...
Or is it because of the location or something of that nature of why it’s so expensive for their offices. Lastly there is the phone/fax/modem, charges of $11,550.06. Wondering why they are so high as well.
Now for the Balance Sheet the only thing that seemed of concern on that one was the amount of Net Income. The amount of Net Income on the P&L was $258,981.84, but the amount that was posted on the Balance Sheet was $259,500.92. Overall it seems like Susan’s business may be in some trouble in the long run, but until I look at some ratios I don’t know for sure what may be the problems.
The first ratio that I choose to do was the Current Ratio to see where Susan’s current liabilities are verses her current assets.
Current Assets = $ 420,380.73
Current Liabilities = $434,984.34
Since it’s suggested that this ratio be at a 2:1 in order to be in a sage position to pay your current liabilities from your current assets, it looks as if Susan is not in a good position.
The next ratio I performed was the Average Payable Period Ratio. This ratio looks at the average time it takes your accounts receivables to be paid by the customers.
Purchases =$ 434,984.34
Accounts Payable =$ 124,509.14
3.49 times/year = 104.6 days to pay
This seems too long for a business to continue to survive with that length of time being so long in order to receive payment on purchases.
The final ratio I used was the Net Profit on Sales Ratio. This ratio looks at a companys profit per dollar of sales. It’s a percent of the sales amount that is remaining after all expenses and income taxes are paid.
Net Income = $258,981.84
Net Sales = $434,984.34 x 100%
This means that Susan keeps 59.5 cents in profit from each dollar sold. This seems to be a good profit margin on sales for her company since it’s a service industry.