Analysis of Financial Performance of Wonderland Construction

Question: Discuss about the Analysis of Financial Performance of Wonderland Construction Supplies. Answer: Introduction The financial statement analysis of business entities helps in developing an in-depth understanding of their present and future financial position. In this context, the report has provided an evaluation of the financial performance of Wonderland Construction Supplies through analysis of its financial ratios. The company has been started with the initial capital of $70,000 and has prepared its financial statements with due consideration of all the significant adjustments of the overall year. The report has also provided a discussion of the methods of depreciation, inventory management and internal control used by the company for improving its profitability and growth. Financial Statement Analysis The financial statements developed by the business corporations includes income statements, balance sheet, cash flows and equity statements for disclosing the financial facts and figures related to the current reporting period. In this context, the analysis of the financial statements as developed by Wonderland is carried out as follows: Income Statement: The income statement provides a description of the revenue, expenditure, net income and earnings per share of a company over a period of time. The analysis of the income statement of Wonderland states that the operating expenditure is more than the revenue realized. Therefore, the company is advised to reduce its operating expenditures for improving its profitability position. Statement of Equity: The statement represents the changes in equity structure if a company over a period of time. It can be interpreted from the equity statement of Wonderlands that it has an initial equity capital of $70,000 from which the amount of $2000 has been withdrawn as drawings. The other reductions in equity capital are due to loss incurred by the company. Balance sheet: The balance sheet of Wonderland has provided an analysis of its assets and liabilities position on the reporting date (Bebbington, Gray and Laughlin, 2001). Financial Ratios Current ratio The ratio provides an analysis of short and long-term liquidity position if a company through providing a comparison of its assets and liabilities position. The formula used for calculating current ratio is: Current ratio=Current assets/Current liabilities Wonderland Current ratio==$78,247.20/ $18,227.00 =4.5 The company has a current ratio of 4.5 which is far better than the current ratio of the competitors that is estimated to in between 1.5 to 2.5. This, the company has achieved a sound liquidity position that will help it to achieve long-term growth. Gross Profit The ratio if gross profit provides an analysis of the current profits realized by a company and can be measured through the formula: Gross Profit Ratio=Gross Profit/Sales Gross Profit Ratio=20,664.00/ $69,120.00 = 29.9% The gross profit ratio of Wonderland is 29.9% that indicates that the company profitability position is not so good. The competitors of the company are having a gross profit ration of about 4.5% and therefore Wonderland should try to reduce its operating expenses for improving the profits realised (Tracy, 2012). Methods of Depreciation The business entities incorporate the use of following tow methods for calculating depreciation: Straight-line basis: The straight-line depreciation method is the simplest method used by businesses for calculating depreciation. The method gradually reduces the carrying value of non-current assets of the company as per its useful life. Reducing Balance: The declining balance method calculates depreciation over the book value of an asset at the starting of a reporting period. The book value of an asset refers to its value obtained after deducting accumulated depreciation from its cost (Bebbington, Gray and Laughlin, 2001). Inventory Management Techniques: FIFO (First in First Out): The method of inventory valuation is based on the assumption that good purchases first will also be sold first. This means that cost of old inventory will be recognized as expenses primarily during inventory valuation. LIFO (Last in Last Out): The method of inventory valuation assumes that inventory purchased last is put to sale first (Hansen, Mowen and Guan, 2007). Mechanism of Internal Control The internal control procedures are developed by a company for ensuring the integrity and authenticity if the financial information in order to meet its long-term goals and objectives. As such, Wonderland can establish internal control mechanisms such as developing Code of Conduct for employees and managers, developing risk and audit committee in order toe ensure that all business activities are carried as per the standard guidelines (Harrer, 2008). Conclusion It can be said from the overall financial analysis of Woolworths that company though is reporting reduce profitability but will be bale to provide strong financial results in the coming period of time with its good liquidity position. References Bebbington, J., Gray, R. and Laughlin, R. 2001. Financial Accounting: Practice and Principles. Cengage Learning EMEA. Hansen, D., Mowen, M. and Guan, L. 2007.Cost Management Accounting and Control. Cengage Learning. Harrer, J. 2008. Internal Control Strategies: A Mid to Small Business Guide. John Wiley Sons. Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.