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Western Governor’s University
Marissa Jose
April 20, 2013
Financial Analysis
RJET TASK 1 Competition Bike
A1.
There are several ways to assess the Competition Bikes. One way to evaluate is to look at
a horizontal analysis. It is a proportional study of income statement or balance sheet over
the past years (Averkamp, 2004).
Second way, the business will be evaluated based on a vertical analysis. Vertical analysis
of an income statement results in every income statement amount being presented as a
percentage of sales (Averkamp, 2004).
The third process to assess the bike company is by means of trend analysis. This is the
practice of collecting information and attempting to spot a pattern, or trend, in the
information (Wikipedia 2013).
The last process is through financial ratio analysis. is the calculation and comparison of
main indicators - ratios which are derived from the information given in a company's
financial statements (Wikinvest 2012).
A1a. Horizontal analysis results
Income statement
While glancing at Competition Bikes Inc, we will be weighing against the sixth and
seventh years, and then their seventh and eighth years.
Earnings appear from the sale of Competition Bikes, Inc. specialized bicycles. Earning
decreases $897,000 or 15% from Year 7 to 8. The drop off was accredited chiefly to the
recent financial condition. The recent financial condition elucidates the huge turn down
in gross profit for Year 8, a 16.3% or $266,600 fall compared to Year 7. The loss of
earnings is a failing to Competition Bikes, Inc. Numerous of the consumers who purchase
are supporters expert bicyclist. Several of the supporters have reduced on the financial
support to the cyclists. Sales trends in the manufactured goods stayed unswerving in
spitefulness of important in general sales turn down from expert riders who favor the
Carbon Lite model.
An extremely important feature whilst investigating how some company is
making and upholding productivity is the operating sequence. This shows at how swiftly
a business is revolving over their inventory, receivables, and payables. In reducing the
operating sequence, companies are able to handle their possessions more proficiently.
The price of merchandise sold is described as the straight rate ascribed to the creation of
the merchandise sold by business. The total would also embrace the charge of the stuff
utilize in constructing the merchandise alongside through the undeviating work costs
used to construct the merchandises. It keeps out meandering operating cost such as
supply costs and sales force costs. The price of goods sold shows on the earning report
and be able to be subtracted from income to compute a business’ gross profit. The cost of
goods sold for Competition Bikes, Inc. decline 14.5% in Year 8, a 31.8% drop contrast to
Year 7. Even though it does draw a parallel to earnings the decrease was not a great deal.
Promoting operating cost such as advertising, website creation and sales commissions,
distribution network support, maintenance, and transportation showed declined by
14.9 %, a slump from 33% in Year 7. The dwindling in the cost between goods sold and
the selling expenses are full force for the company.
If we take a look at the General and Administrative expenses such as administrative
supplies, executive compensation, employment taxes, utilities, payroll services, research
and development, depreciation expense and more, it showed increased 1.2% in Year 8.
The increase in general administrative expenses are pertinent to an 11.1 a raise in utilities,
a 7.6% a raise in other general and administrative expenses and a decline of 16.3 % in
research and development. The significant increase in the general and administrative
expenses is a weak point and the decline of research and development is another weak
point for Competition Bikes, Inc.
The operating income for Competition Bikes, Inc. declined 69.1% in Year 8. The decline
in operating income is a weak point against business. In general the operating income
performance of Competition Bikes as well decreased in Year 8 by a 69.1% decline from
Year 7, this decrease is another weak point for the business. The net interest expense
decline 8.9 % by Year 7. The decline in net interest expense is definitely the strength for
Competition Bikes, Inc.
The net earnings declined 81.6% in Year 8. This significant decline in net income is due
to the recent financial condition and is a weak point for Competition Bikes, Inc.
Competition Bikes, Inc. affirms to glimpse a boost in product sales for the upcoming
three years. It would be additional strength for the company.
Balance Sheet
Balance sheet is an illustration of both strong point and development in major spots.
Cash and Cash Equivalent – totaled $92,376.00.00 in year 7 showed increased
$321,661.00 or +348.2 %.
Short Term Investments – totaled $220,000.00 in year 6, a gain of $21,500.00 or +10.8%.
Total Current Assets – Analysis for the 3 years. The expansion exposed below.
Year 6 to 7 totaled $1,029,303.00 and increased to $323,741.00 or +31.5% to
$1,353,044.00.
Year 7 to 8 totaled $1,353,044 and increased $227.786 or +16.5% to $1,575,831.
Assets – totaled $98,820.00 in year 6, and grew $31,440.00 or +31.8%. This
demonstrates several assurances as it talk about the strength since it indicates products in
production.
Work in Process – totaled $130,260.00 in years 7 to 8 and demonstrated strength with
$0.00 or 0% increase. The business do not require effort in process inventory as orders
were knowingly fewer in years 7 to 8.
Accounts and Notes Payable – totaled $67,080 in year 6, accounts and notes payable
were solid raising 33.3% or $65,300.00 to $195,900.00 in years 7 to 8. This is a sign of
strength since the business had lesser than predictable sales. Spending extra on
financial records would have charge the company the net revenue. It reveals net revenue
is income minus the operating expenses, also when the disbursement is linked with
financial records payable, the disbursement is to be noted at the moment the financial
statement payable is documented and not at the moment of the imbursement. Through
this it merely influences 2 balance sheet accounts; nothing involved even the income
statement account or other disbursement account. Operating expenses are costs the
business applies to earn earnings; it could as well costs that expenditure throughout the
financial credit period, for that reason it can have effect prior to or following cash
operating expense are completed.
Largely the full amount possessions remained steady, with a decrease of 0.2%. The recent
liabilities accounts improved $66,500 or 2.8% over the prior year. This raise is by means
of a growth of 33.3% on the accounts and payable accounts.
Let’s take a look at the Accrued Salaries and Related Expense account which illustrates
strength from year 6 to 8. It rose to 13.6% and the additional accrued expenses account
rose by 4%.
In general the raise in this report illustrates the elevated operating cost and is a weak
point for the company. On the other hand, the total liabilities reduced to 1.9% or
$38,500 in the Year 7. These include mortgage payable and other long-term liabilities,
which together reduced 5.9%. The reduction in the above accounts is a strong point of the
company since it illustrates that the business is disbursing its long-term liabilities as
planned. Besides, the total stockholders’ equity accounts rose to 1.4% or $31,286.00 in
the Year 7. This augment was done mainly by the raise in Retained Earnings at 2.7% or.
$31,286.00. Retained Earnings sum up in year 6 was $979,223.00, and grew $170,121.00
or + 17.4% end year 6 at $1,149,344.00. By 7th year, increase was noted to be up another
$31,286.00 or +2.7% ending year 7 at $1,180,631.00.
Weaknesses
Weaknesses within the three years were from year 6 to 7 and this covers
Cash and Cash Equivalent which took -64.6% jump from $261,000.00 to $92, 376.00, a
reduced of $168,624.00. Encompass minimal cash and cash equivalent balance was
unsafe since hard cash is required in the occasion that recent liability befalls to due.
The weakness of the company happened in year 7-8 since zero growth in the Short Term
Investment and the balance stayed at $220,000.00 from the 2 years.
Raw Materials Inventory – sum up to $104,480.00 in year 6, then slumped to $15,672.00
to $88,808.00 for a (-) 15% decline in the year 7. This was a flimsy turn down since of
how fundamental a reserve raw product is for assembling. This turn down does not
permit Competition Bikes to execute the works they were employed to perform. For
Competition Bikes, year’s 6 to 7 was crucial because of the gainful time of the year.
Accrued Reduction – it illustrates a balance sheet weakness while equipment was
decreasing, years 7 to 8 declined to manufacture extra earnings; the equipment declined
to profit from in its venture.
Reduction for years 6 to 7 was $230,000.00 or 100% while years 7 to 8 was $230,000.00
but it just 50% this time. This had a distressing failure for Competition Bikes in earnings
and profits.
Accounts and Notes Payable has been frail in years 6 to 7 because of intense grow of
192%, a change from $195,900.00 to $324,721.00 which resulted to $128,820.00
disparity.
A1b. Vertical Analysis
Income Statement
Strengths
Strong points in Vertical analysis are firmness in gross profits of the proportions;
Horizontal Analysis illustrates a rigorous decrease however the percentage of cost of
goods to net sales were uniformly level crosswise the panel.
Gross Profit – summed up $1,191,000.00, which is 26.6% of $4,485,000.00 in year 6, in
year 7 gross profits summed up $1,638,000.00, and that is 27.4% of $5,980,000.00.
While in the year 8 it summed up $1,638,000.00 or 27% of $5,083,000.00. These
figures indicate strong point while although Net Sales slumped, Competition Bikes
locked a profit of roughly 27% of gross profit for three successive years.
Balance Sheet - strong point for the previous three years was a huge raise in Net
Earnings, year 7 encompass $170,121.00 or 2.8% of the Net Sales of $5,980,000.00.
This is the maximum transform in income of the 3 years examined as it three times year 6
at 0.9%, and four times year 8 at 0.6%.
Interest Income - A 0.1% of interest income continued successive all through the three
years.
The company held in reserve a concrete Interest Income in the toughest time, year 8
$5,600.00 was reserved as supplementary earnings in favor of this year.
Weaknesses
Weak point with in the three years:
Executive Compensation - the utmost in year 8 at $220,000,00 of Net Sales or 4.3% that
summed up $5,083,000.00, as contrasted to previous year 6 at 3.8% and at the year 7 at
3.7%, which is indisputably weak point for the company.
Other General and Administrative expenses – wherein additional cash $170,000.00 or
3.3% was used up on this part in year 8 which is the least gainful year. In the year 6 they
used up 2.7% while in the year 7 used up 2.6%. The supervisor must have had decisions
prepared to diminish disbursements throughout the 3 year low down; typically it was
necessitated in the year 8.
Executive Compensation and Other General and Administrative expenses - added 18.4%
or $935,119.00 of Net Sales; chief weak point which requires amendment as Total
operating expenses exemplifies just 1/4 of net sales in year 8.
Net Earnings - Year 8 was the weakest based on to the vertical analysis, $31,286.00 at
0.6% of Net Sales $5,083,000.00, was probably due to little support of sponsors for
bikers.
Balance Sheet
Strengths
Cash and Cash Equivalent - the Current Assets in year 8 including Total Liabilities and
Equity disbursed in $414,038.00 or 9.7% of the $4,285,831.00 in Total Liabilities and
Equity; it was strength that year since of the recent financial situation in year 8; Net Sales
were low down, as a result standing by obtainable money was a enormous proposal as
payments could have been obligatory.
Current Assets in Accounts Receivable – 14.2% or $609,960.00 net sales is a heavy
quantity of assets that will turn into fluid for the company which is necessary to exceed
the stumpy financial years in this coarse financial year.
Liabilities the Mortgage Payable declined in year 8, while in the year 6 this illustrates the
thing was at its utmost $1,800,000.00 or 42.9%, while year 7 $1,700,000.00 or 39.6% and
most probably the smallest in year 8 $1,600,000.00 or 37.3%. This corresponds to strong
point since in this year Competition Bikes Company could have utilized any reserves
given its recent condition.
Weaknesses
Current Assets as Cash and Cash Equivalent - for year 7 it was $92,376 or 2.2%, this
signifies a weak point since the Competition Bikes is not having sufficient instantaneous
liquidity when required.
Account Receivables - balance was 16.7% or $717,600.00 of total assets amounting to
$4,293,044.00; which illustrates a weak point since the company has not been disbursed
by its customers, and for that reason is not obtainable for asset back into the business.
Liability – in year 8 accounts and notes payable was huge it illustrates 6.1% or
$261,200.00 of entire assets, this showed huge arrears to the company.
Competition Bikes Company handles to accumulate $195,900.00 or 4.6% of total assets
in year 7 while in Year 6 the company had the smallest arrears in Accounts Payable
which showed $67,080.00 or 1.6%.
Accounts Payable in Year 8 showed weakness because the debt was too high for the
current economic condition.
Year 6 Retained Earnings showed 23.3% or $979,223.00 of total assets, this item in year
although year 6 fairly produced he similar proportion as year 8 Income Statement: year 6:
26.6 while year 8 was 27.0%. The company’s Retained Earnings were fairly low in the
Year 8 Retained Earnings was $1,180,631.00 or 27.5%.
A1c. Trend Analysis
The objective of executing trend analysis is to gather data over a phase of time, and to
employ that information to mark a trend or an outline. Beneath these circumstances of
relative study, the funds of a business are assessed over in order to forecast upcoming
prospective depended on previous presentation.
As we come across at Competition Bikes past figures for net sales, it illustrates over a
year increase, with the exclusion of year 8. Beginning year 6 to year 7 it showed there
was a momentous increment in sales with a modest above 33%. Whereas net sales
decreased in year eight by roughly 20 % from the preceding year, but it in spite
represented a gain above year 6. For every succeeding year after year 8, there must be a
sturdy mount in sales. Since there is extremely modest change in operating expense,
though sales slumped off, the productivity of the company stayed powerful. This trend is
envisaged to seize through the rest of years 9 all the way through 11.
Known the progressively rising sales, the business would be appealing to investors
appearing for stable but consistent upcoming development. Whereas sales are growing
gradually, the net income carries on noticing augment that are in bikes.
A.1.d Ratio Analysis
Liquid Ratios
Ratio analysis is the transmutation of financial figures into plain arithmetic proportion
conducive to use for contrasting with other, related businesses.
Ratios are calculated from current year numbers and are then compared to previous years,
other companies, the industry, or even the economy to judge the performance of
fundamental analysis (Investopedia, 2013).
Information from precedent years that is extensively accessible through community
economic statements can be evaluated and contrasted to other organization, and the
outcome of these contrasts can supply fundamental clue when creating resolutions. In the
case of Competition Bikes, four dissimilar benchmarks will be used to compute the
economic situation of a company.
First, the Liquid Ratios are used to decide a company’s capability to disburse its
temporary arrears liabilities. Numerous liquidity ratios embrace the current ratio, price
earnings, the acid test or quick ratio, and average collection period. The recent ratio is
5.25% as contrasted to Two Wheel Racing’s 4.2%. This ratio tests illustrates the
company’s capability to disburse temporary arrears. A figure as elevated as 5.25% raise
denotes that organization has very much ready money available which may be portraying
an atrocious work of spending it in contrasting to Two Wheel Racing. Competition Bikes
are in a vaguely much improved economic situation to speedily payoff temporary arrears.
Second, the Acid Test Ratio is 4.14% in contrast to Two Wheel Racing acid test ratio
which is 3.4 %. This ratio calculates the arrears disbursing capacity of an organization
with no counting inventory. Typically a sky-scraping liquid ratio is a sign the business is
liquid and has the capability to congregate its recent or liquid accountabilities in point in
time and alternatively small liquidity ratio symbolizes that the business liquidity location
is not excellent. In addition, in contrast to Two Wheel Racing its well benefits using the
acid test ratio. For Competition Bikes Inc. the inventory turnover ratio does not be
relevant since the firm dispatches the tandem as quickly as they are finished. Under other
conditions, the inventory turnover for Two Wheel Racing Company is 3.4%. In contrast
to Two Wheel Racing, Competition Bikes Inc. is at well benefit with the inventory
turnover. Twenty five days (25) are the standard compilation phase for the business to
accept disbursement statements through financial records receivable from their dispensers
Two Wheel Racing. Competitive Bikes Inc. must glance into diminishing the quantity of
compilation days. The liquidity location of Competitive Bikes is standard for the business
in which it utilized. Noticeably, the greater the worth of the liquid ratio, the higher the
edge of security that the firm will acquire all to wrap its whole temporary arrears. The
company’s capability to twist temporary possessions into money to wrap arrears is of
great significance when receivers are looking for imbursement. Liquidation analysts and
finance instigators often employ the liquidity ratios to conclude whether the business will
be able to carry on as a going distress.
Third is the Profitability Ratio which presents numerous dissimilar procedures of the
success of the company at creating income. The debt ratio for Competitive Bikes is
46.2% contrast to its opponent Two Wheel Racing whose debt ratio showed 38%. This
ratio indicates that the firm has approximately as a lot arrears as it does asset. This
indicates that while Competitive Bike does not count on debt to activate its industry in
contrast to Two Wheel Racing, we must glance at methods to lessen our arrears ratio. The
gross profit margin for Competitive Bikes does not rely on arrears to run its industry in
contrast to Two wheel Racing, we must glance at methods to lessen our arrears ratio. It
shows 27% gross profit margin for Competitive Bikes. The gross profit margin is a
computation of the gross profit produced on sales. The gross profit margin regard as the
firm’s price of supplies sold, but does not embrace extra expenses. In contrast to the
profit margin of Two Wheel Racing of 32.1% we must glance at methods to decrease
costs to increase profit. The operating profit margin for Competitive Bikes is 1.9%. The
operating profit signifies how efficient a business organizes the expenses and costs
connected with their usual trade action. Two Wheel Racing showed operating profit
margin of 5.2% compared to the Competitive Bikes which has 1.9%. In year 8 the net
profit margin for Competitive Bikes is 0.6% as compared to Two Wheel Racing which
has 5.1%. The net profit margin is extremely helpful when weighing against firms in
comparable businesses. The greater profit margin specifies additional gainful business
that has enhanced control over its expenses contrasted to its opponents. With regards to
net profit margin Two Wheel Racing has a lead over Competitive Bikes.
For Competitive Bikes the earnings per share are $0.03 as contrasted to
$0.08 at Two Wheel Racing for Year 8. The earnings per share are the segment of firms’
earnings payable to every exceptional split of universal stock. Earnings per share measure
out as a basis of a company’s productivity. It is also a main constituent used to compute
the price-to-earnings evaluation ratio. In contrast to Two Wheel Racing they have the
lead over Competition Bikes Inc.
Lastly in year 8 the Return on Equity Ratio for Competitive Bikes the total assets is 0.7%
as contrasted to 4.8% for Two Wheel Racing. This ratio specifies how proficient an
industry uses its possessions to create income. The greater the pace of come back on
assets signifies the efficiency of the business to earnings with modest savings. In contrast
to Two Wheel Racing they have the favor over Competition Bikes Inc.
The percentage of return on common equity is 1.4 percent. This rate is a computation of
how much earnings the firm can create with every buck invested by investors. The below
rate signifies a small come back on net value. Compared to Two Wheel Racing that has a
rate of 8.1%, they have a great advantage over the Competition Bikes Inc.
This proportion calculates how a business can disburse the interest expense on
exceptional arrears. The smaller this proportion is the greater a business is bothered by
numerous of arrears. In general, a times interest ratio of 1.5% or below implies uncertain
finances to wrap interest cost on arrears loaned. With a percentage of 1.77% it might
indicate that a enduring borrower would be uncertain to spend. In contrast to Two Wheel
Raving, they have the favor with a rate of 4.24 percent. The price earnings ratio in year 8
for Competition Bikes Inc. is 96.61 percent at the marketplace share of $3.10. The steeper
the price earnings ratio is, the steeper the predictable earnings per share. The rate is
extremely steep, but the come back specified by the earnings per share is extremely
stumpy. The examination of the business provides the thought of being in a dilapidated
trend. This would discourage prospective ordinary financiers from spending in the
business. In contrast to Two Wheel Racing, they have the favor with a percentage of
twenty nine percent (29%).
A2. Working Capital
A measure of both a company's efficiency and its short-term financial health. The
working capital ratio is calculated as: Working Capital=Current Assets – Current
Liabilities (Investopedia, 2013). Current Assets subtract Current Liabilities will sum up
the total of working capital the firm has in a known period of time. Where there is an
affirmative steadiness for working capital, it indicates that a business is capable to
disburse its temporary responsibilities. An unfavorable working capital share suggests
that the business is not capable to disburse temporary responsibilities. The working
capital amount for Competition Bikes at the end of Year 8 is
$1,275,631.00. This total consolidates for financier that Competition Bike is capable to
disburse its temporary legal responsibilities. The total of working capital has also
augmented significantly more in the last 3 years. Concluding liquidity of working capital
as well employs the recent ratio and the acid-test ratio.
In Ratio Analysis it illustrates the current ratio is 5.25 percent and the acid test ratio is
4.14 percent. A figure as elevated as 5.25% raise connotes that organization has very
much ready money available which may be portraying an atrocious work of investing.
The soaring working capital proportion could as well denote that there may be huge total
of cash fixed in accounts receivables and or stocks. It is very significant to glance at one
resolution that there could be to stipulate in advance imbursement from the receivables
accounts and to slash back on the stock griped. This resolution merely is a swift mend
and may not assist to handle the working capital efficiently, other than it would get extra
currency from receivables.
There are three major features for booming working capital management and these are;
accounts receivable, accounts payable, and inventory (raw materials and work in
progress). Boosting these three phases of working capital will definitely progress the
working cycle and the currency exchange cycle, plus dropping expenses and facilitate to
attain greater income prior to income levies. The operating cycle is the amount of time it
takes for a company to turn cash used to purchase inventory into cash once again (Chegg,
2003-2013). This number is calculated by adding the age of inventory (the number of
days that inventory is held prior to sale) with the collection period (the number of days
required to collect receivables). A company with a short operating cycle is able to quickly
recover its investment (Chegg, 2003-2013).
In order for Competitive Bikes to boost working capital management, they require to
develop these entire three features at the same time. One approach for competition Bikes,
Inc. to employ extra working capital to create an augment in earnings would be to put in
in hauling department to decrease an extensive segment of the transportation out charge
of its selling expenses.
Accounts Payables
Based on the recent Working Capital and Cash Flow the dealers invoice Competition
Bikes, Inc. at the last day of the month for orders that month with terms of net/15.
Competition Bikes, Inc. disburses the statement on every 15th of the month subsequent
the order. The checks are generally changed on the 20th of the moth by the dealers. This
process is presently effective and does not require to be re appraised at this instance.
Accounts Receivables
Recently, Competition Bikes, Inc. mails the suppliers a monthly statement for the entire
raw materials purchased with terms of net/ 30 days. A suggestion to Competitive Bikes is
that they must agree the conditions of their receivables to net/10 or fifteen days. In this
case, this will significantly lessen the standard compilation time from 43.8. Preferably
they should reduce the compilation time to an average of twenty days to have it standard
over the opponent company Two Wheel Racing.
Reduce Inventory
In the recent statements of Competition Bikes Inc. inventory is disbursed for in the month
subsequent fabrication. The entire inventory purchased for the month is exercised
throughout the month with closing inventory lasting at exceedingly constant height.
Twenty five days is the standard time in inventory. The recommendation to Competitive
Bikes is that they must take a glance at their inventory management system and glance at
executing a just-in-time scheme to lessen the instance that the supply stocks on the shelf.
A3. Internal Controls
Assessing Competition Bikes Inc. interior controls Purchasing System Internal controls
are method set in place by the organization to ensure the reliability of economic and
accounting statements, productivity goal and convey managing guidelines, and meet
operational all over the institution.
Internal controls assist the firm communications work efficiently. Internal controls also aid
defends and averts deception. Internal control will attempt to get rid of the enticement
for staff to take unprofessional action in the phase of situating the firm at risk of
grievance. The purchase department of CBI will place an order from dealers according to
the company per month finances. As soon as the order has been received the purchase
department will assess proposal from diverse suppliers. As soon as the purchased has
been delivered they will then prearranged to the manufacture line. The proof of purchase
will be mailed to the purchasing department. If let say there are some materials left they
will be mailed to raw materials unit. The purchasing department will then mail an
accounting department who provide a payment to the dealer.
Recommendation
The entire procedure must be renewed. Initially, it is very essential to split the
responsibility of exploring the proposal and purchasing orders department. In addition,
the receiving department must be the responsible of confirming the delivery when the
parcels disembark. The receiving unit requires confirming each piece is present from the
dealer and without mislaid piece from the supplier. The receiving unit should as well
preserve an account control system. Succeeding to the receiving unit has permitted the
proof of purchase, next it should then be sent to the purchasing department. The purchase
order will be frontward to the bookkeeping unit for imbursement. Bookkeeping has
presently been only accepting unconfirmed statements.
A3a. Weakness Corrective Actions
I will recommend for the Competition Bikes Inc. to create the subsequent remedial
measures for the weak points originated in the department of accounting, purchasing, and
receiving. As soon as the purchasing department has arranged the purchase for the
supplies required by division managers, the purchase order details should be mailed to
accounting and receiving department. In this process the receiving unit will validate that
the supplies were collected and directed to the accurate locations and to facilitate the
accounting department to make sentient of the orders and to anticipate authentication
from receiving department. A materials request form should be materialized and then
disseminated to division managers. Division managers will verify account records and
deliver the material request form to purchasing unit to place purchase order of supplies
according on the material available as well as per month development for required
supplies. Upon receiving of the purchased supplies the receiving unit will validate the
accurate figure of objects accepted and then will direct to the right unit. Authentication of
the proof of payment of the supplies will proceed to the accounting unit. Upon receiving
of the confirmation of the receiving supplies, the accounting unit will conform every
document to the purchased orders and will wait for proof of purchase from the supplier.
Every financial statement owed invoices must be mailed to the accounting unit for
confirmation of imbursement. While the accounting unit has verified every record,
confirmed that the supplies have been collected and the proof of purchase from the dealer
has been obtained, it can then release imbursement for the bill and mail the checks to the
proper authority. Two people are required to sign for every check that departs the firm.
This will make certain liability from every responsible individual. The controller must be
the one responsible of the checker and the signer for the account. The accounting unit
will collect the signed checks with the certification and then will mail the imbursement to
the dealers.
A3.b Risks
Identify the risk to the company
The risks that have been identified for Competition Bike, Inc. are guiding principle and
measures, precise economic reporting and interior controls. The guidelines must be lucid,
logical and succinct. They oblige to specify the sequence of authority and interior
controls are to be in proper position. Every department must be responsible for
explaining precise data and the administration is accountable for assuring that everything
is precise. The succeeding risks have been recognized:
1. The risk that is evident is the certainty that the purchasing department has significant
amount of control. Within the unit having a great power over a procedure it provides the
workers a chance to gain benefits of the firm. It also creates a proclivity for inaccuracy
and complicity with marketers.
2. The accounting unit requires confirmation that the supplies demanded by the purchaser
were expected to be delivered prior the invoice can be disbursed. It does not emerge to be
a structure of invoice and any money remaining in the account with the involvement of
the accounting and purchasing unit.
3. Another dilemma is that they did not point out about the inventory control and/or the
receiving unit. The receiving unit must be the responsible in receiving the merchandise
and not the purchasing unit. This once more takes part into the scheme of invoice and
balances. When the accounting unit get corroboration from receiving that the supplies
have been transported in the accurate amount, this will aid with inventory control and
create the purchasing division liable for their proceedings.
4. Additional problem that is missing from the procedure is that there was no designate
person who will sign the allocated checks. It is not evidently definite who will sign the
checks for imbursement.
A.3b.i. Risk Mitigation
In able to alleviate the risks occurring from internal control weak point the subsequent
stuff must be done:
1. Materials requisition form needs to be developed and distributed to department
managers. Division managers will test supply and will give the material request form to
the purchasing unit to purchase supplies according on the available materials and per
month plans for required supplies.
2. As soon as the purchaser has put the purchase order for supplies required by the unit
managers, the purchase order info must be mailed to accounting and receiving unit. This
technique the receiving unit will validate that the supplies were received and transported
to the accurate sector and the accounting unit will then be sentient of the supplies and
anticipate corroboration from the receiving unit.
3. Once receipt of the purchased supplies the receiving unit will validate the accurate
figure of things received and will be transported to the right sector. Corroboration of the
proof of purchase of supplies will then send to the accounting unit.
4. Once receipt of the corroboration of the receiving of supplies, the accounting unit will
compare all identification to the invoice and will anticipate proof of purchase from the
dealer. Every single accounts payable statement must be mailed to the bookkeeping
department for corroboration and imbursement.
5. Once the accounting unit has compared every document, confirmed that the supplies
have been delivered and the proof of purchase from the dealer has been obtained, it can
then release the imbursement for the invoice and will give the checks to the responsible
person for signature.
6. There must be two signers to sign every check. This will ensure liability from every
involved individual. The controller should be one of the signers.
7. The accounting unit will accept back the sign bills with the records and mail out the
expenditure to the dealers. Create a working plan and a tactical development process for
the business. The operating sketch and the tactical sketch will take into account yearly
finances and regard as sporadic reports for the business. This as well allows the business
to observe the progress of economic and operational presentation measures and assess the
recent flow.
Other risk Mitigation risks
1. Ascertain a Trade policy of Conduct for Competition Bikes, Inc. This would guarantee
that every staff is competent, moral and trustworthy.
2. Generate work specification for every rank and allocate tasks to diverse workers.
This makes certain that all workers are held liable for the task assigned. In addition, this
guarantees that there is partition of duties of among workers to decrease deception. The
guideline and safety practice and procedure must as well embrace the border for
authorization of payments.
3. Perform interior and exterior reviews to guarantee that the internal controls are
running appropriately and efficiently. The inspection of financial records would comprise
self- evaluation and ponder evaluation to ascertain accurateness and effectiveness. The
inspection of financial records would as well guarantee that appropriate records go along
with each operation to corroborate liability, limit deception and specify the complete
business deal.
4. Competition Bikes, Inc. must begin executing an agenda that permits constant
development that would permit for amendment of the procedure and assessment as to
where they belong into the procedure and integral strategy.
A4.Compliance
Sarbanes-Oxley Act
An act passed by U.S. Congress in 2002 to protect investors from the possibility of
fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX)
mandated strict reforms to improve financial disclosures from corporations and prevent
accounting fraud (Investopedia, 2013).
Competition Bikes Inc. did not declare if they were inspected by external company. I
wholly suggest CBI to employ evaluating company to evaluate the firm’s yearly
testimonial prior to discharging the records to the media and to assure there is no factual
error in accounting. Internal controls are executed and efficient at the conclusion of year
8. The attestations for CBI CEO and CFO are obligatory since it is requisite by SOX and
this could not be situated. Assessor discharges the subsequent declaration to investors. A
material weak point is a control insufficiency, or a mixture of control shortages, in
internal power over economic reporting, such that there is a rational opportunity that an
items misdeclaration of the firm’s yearly or temporary economic account will not be
prohibited or identified on a timely manner.
A4a. Non compliance corrective actions
CBI must assure that they are in compliance with the guidelines proposed by Sarbanes-
Oxley Competition Bikes Inc. It is highly recommended for Competition Bikes, Inc. to
take instantaneous remedial plan of action to be submissive with the Sarbanes- Oxley Act
of 2002. The commendations to be compliant with Sarbanes- Oxley Acts Section 404 are
the following:
1. Generate a partition of responsibility within the accounting, receiving, and
purchasing, units. This will aid the averting of deceptive buying, illicit buying, and
complicity with retailer.
2. Ascertain a method of buying necessitate and permission to buy. This will aid with
the liability and general account control.
3. Utilize the services of an interior review panel to assess and uphold the technique of
Competition Bikes, Inc. The interior assessors will embrace all sections and staff liable
for their activities. The interior assessors would as well make certain that the interior
controls are performing appropriately and efficiently. The review would also encompass
and make certain that appropriate citations come with each operation to corroborate
liability, reduce deception and detail the total deal. Audits as well make certain that the
account managing scheme is being supervised properly. Performing frequently planned
inspection will assist to supervise the info and message interior controls.
4. Utilize the services of an exterior review panel to assess and uphold the technique of
Competition Bikes, Inc. The exterior examiners will embrace the departmental managers
liable for the activities of the units.
References
Averkamp, H. (2004) Horizontal Analysis vs. Vertical Analysis Definition, retrieved
from: http://blog.accountingcoach.com/vertical-analysis-horizontal-analysis/
Wikipedia (2013) Trend Analysis definition, retrieved from
http://en.wikipedia.org/wiki/Trend_analysis
Wikinvest (2012), Financial Ratio Analysis, retrieved from
http://www.wikinvest.com/wiki/Ratio_Analysis
Investopedia (2013) Ratio Analysis, retrieved from
http://www.investopedia.com/terms/r/ratioanalysis.asp
Investopedia (2013) Working Capital, retrieved from
http://www.investopedia.com/terms/w/workingcapital.asp
Chegg (2003-2013) Operating Cycle, retrieved from
http://www.chegg.com/homework-help/definitions/operating-cycle-37
Investopedia (2013) Sarbanes-Oxley Act of 2002, retrieved from
http://www.investopedia.com/terms/s/sarbanesoxleyact.asp