The following paper is based on financial data from the March 2013 Competition Bikes, Inc. financial statements.
A. Summary Report
1. Operational strengths and weaknesses of Competition Bikes Inc.
a. Horizontal Analysis: A popular method of analyzing financial statements, horizontal analysis is defined as “the comparison of historical financial information over a series of reporting periods, or of the ratios derived from this financial information.” (Accounting Tools, 2014) Horizontal analysis is often used to examine a company’s financial performance over a period of time such as a three year period. By examining a company’s financial statements and applying horizontal analysis, we can build a picture of how the company has performed based on changes from one period to the next. There are several areas of Competition Bikes Inc. financial statements which will be examined to determine its performance. These areas include: net sales, gross profits, net earnings, total operating expenses, total assets, total liabilities, and retained earnings. Beginning with the company’s net sales, we see a gain from years 6 to 7 with gross profits growing by $1,495,000 or 33.3%. In years 7 to 8 we see a decline in sales with only $897,000, a change of -15.0% from the previous year. While this is a weakness for that given year, the overall profitability of the company may not be affected by this decline in sales. To help determine profitability, we need to examine gross profits which are the company’s net sales minus the cost of goods. When examining gross profits, we see a sizable increase in from year 6 at $1,191,000 to year 7 at $1,638,000, for a total increase of $447,000 or +37.5%. In year 8, gross profits declined, bringing in $1,371,000, a difference of $266,600 or -16.3%. Overall, Competition Bikes has a gross profit of 21.2% which is a positive sign of growth and