Horizontal Analysis: Financial Analysis

A1a. Horizontal Analysis

Income Statement Horizontal Analysis

Horizontal analysis is the comparison of sequential historical financial reporting periods; quarterly or yearly. The objective is to find fluctuation between the periods which would indicate a gain or loss of dollars requiring additional examination to determine the cause of the fluctuation. Horizontal Analysis is performed on the income statement and balance sheets comparing at least two time periods of data listed side-by-side with the variance to the right. In review of Competitions Bike’s income statement, the 3 year evaluation period shows strengths and weaknesses. The first set of data evaluation will be years 6 and 7, followed by years 7 and 8.

At the top of the income statement

There was an increase in utilities of 11.1% in year 8 from year 7, which is much higher than the previous year’s increase of 3.8%. This is a weakness to the Competition Bikes to not correctly react to the reduction of net sales. Research and development (R&D), decreased by -16.3% in year 8 from year 7. This reflects strength in operations to reduce expenses as a result of decreased sales; however the R&D reduction does not position Competition Bikes to continue with improvements in their product to maintain a competitive advantage. A weakness to the company is not providing any merit or annual increase to employee. The previous year had a large increase, but there was not increase in year 8 from year 7. This weakness does not provide any motivation to employees and can reduce morale. Operating income reduced in year 8 by -69.1% from year 7 which is a result of reduced revenue and operating expense not reducing enough to react to the slowing economy. EBIT and net earnings both decreased by -81.6%, which is a weakness to Competition Bikes. This weakness is due to little or no reduction to the general and admin expenses. The increased overall expenses cut into overall profitability and shareholder

This is strength for the company while still able to maintain one million toward common stock. In year 7, Competition Bikes was able to invest $100,000 in Treasury Stock which reflects strength in the company.

Between year 7 and 8, cash and cash equivalents increased by 348.2% which is a strength in the company and positions them to easily cover accounts payable of $261,200. Accounts receivable decreased by -15% which reflects a slight weakness, but trends with the reduction in sales and is a reaction to the weakening economy. Accounts and notes payable continued to increase in year 8, but only by 33.3% from year 7. Even though this is still an increase, the increase was minimal compared to the previous year’s increase which is a reaction to the reduced net sales and reaction to the weakening economy. Overall total current liabilities decreased by -1.9%.

Total stockholders’ equity continued to increase in year 8 from year 7 by 1.4% with 2.74% increase in retained earnings. This is continued strength for the company while still able to maintain one million toward common stock. In year 8, Competition Bikes continued to invest $100,000 in Treasury Stock which reflects strength in the