Income statement of Al Ain Products-Free-Samples for Students

Question: Anayse the CVP Income statement and balance sheet of Al Ain Products, Inc. Answer: Introduction Al Ain Products, Inc was formed by Shamma Zaid in 2010 to distribute nationally an input device that is pen-based and is able to provide effortless communication for the personal computers. Ms Zaid is concerned about the availability of sufficient cash to accommodate the expected growth of AAP. Further, she wants her financial analyst to help her in financial planning. This report will present the analysis of CVP income statement and balance sheet. Moreover, the study will represent the analysis of financial position of the company. It will also present the recommendation by the financial analyst and the cost volume profit analysis of the company. Discussion Sales plan and cash collections Looking at the sales plan of the company, it is identified that the company make it sales on 100% credit and the sales are in increasing trend. Sales increased from $26,28,948 in July to $32,69,183 in September. Total collection of the company is also in increasing trend that is aligned with the increasing sales. Therefore, it can be said that the company is efficient is collecting its dues (Ahmed Duellman, 2013). Purchase plan and cash plan The purchase plan of the company is in increasing trend and the company is planning to purchase 11,100 units, 12,375 units and 13,075 in July, August and September respectively. With the increase in purchase units, the payments for the purchase is also will increase. Therefore, it can be said that the company is efficiently making payments for its dues. Income statement and balance sheet The sales of the company are in increasing trend and the net income of the company is also in increasing trend. The total assets as well as liablities of the company for the month of September amounted to $ 68,07,939. Account receivable of the company forms a major part of the asset and amounting to $ 34,93,969. The retained earnings of the company amounted to $34,15,685. Contribution margin The contribution margin of the company is in increasing trend and is aligned with the increased sales volume. Therefore, it can be said that the company is able to manage its variable expenses efficiently and generating contribution out of the sales. CVP analysis From the CVP graph it is identified that the cost and revenue will be same that means profit will be zero at the sales level of 600,000 at the time of between 5th year and 6th year and after that year te company will start earning positive profit. Analysis of quality of income Particulars July August September Total Operating cash flows $ (206,352.80) $ (102,641.13) $ (51,082.32) $ (1,121,786.03) Net income $ 206,668 $ 251,611 $ 303,430 $ 761,710 Quality of income -1.00 -0.41 -0.17 -1.47 Quality of income represents the operating cash flow proportion with regard to net income. Generally, a ratio that is greater than 1 is considered as high quality of income whereas a ratio less than 1 represents low quality income. Therefore, the quality of income is the earnings amount that is generated from the operation of business. Looking at the quality income of APA, is is identified that the quality of income for July, August and September are negative (Edmonds et al., 2016). The main reason behind that is though the company was able to generate positive income; it was not able to generate any positive cash flow from operations over all the three months. However, it is recognized that the company is improving its quality of income. Reason why income is greater than the operating cash flow Generally, the operating cash flow of any organization is always more than its net income. Net income is calculated by subtracting the operational expenses, cost of sales, amortization expenses, depreciation, taxes and interest from the total revenue (Weygandt, Kimmel Kieso, 2015). On the other hand, the net cash flows from the operating activities are calculated as the sum for net income, changes in working capital and non cash expenses. If the cash expenses like interest expenses is more or the company has made then the net income of the company may be more than the cash flow from operation (Demski, 2013). Two areas where the company is not using its cash effectively are the accounts receivable and inventory. Under the accounts receivable the, amount of account receivable is increased from $327,558 in July to $362,292 in September (Chiu Okudan, 2014). Therefore, the company shall make required efforts to collect the receivables efficiently. Further, the company is also not making its purchase efficiently as it is identified that purchase of inventory has felt from $164,070 in July to $92,408 in September. The financial analyst shall look into this matter and take necessary steps to improve its inventory position (Farris et al., 2015). Computation of financial metrics Calculation of financial metric Formula July August September Operating margin Operating income/sales 7.92% 8.66% 9.38% Days sales in ending accounts receivable Ending accounts receivables/average sales per day 36.42 Inventory turnover cost of goods sold/average inventory 0.31 0.31 0.33 Asset turnover sales/average total assets 0.48 Measurement of performance Looking at the financial metrics of the company, it is recognized that the operating margin of the company is increasing trend and though it was 7.92% during July, the company was able to increase it to 9.38% in September. The competitor average is 8.9% and that of industry average is 8.2%. Therefore, the operating margin of the company is better as compared to the competitors as well as the industry average (Marr, 2015). The companys account receivable cycle is 36.42 days whereas the industry average is 31 days and competitors cycle is 28 days. Therefore, the company shall take necessary steps to improve its receivable cycle. Further, the inventory turnover as well as asset turnover ratio both are significantly low as compared to the industry average as well as the competitors ratio. Therefore, the financial analyst shall look into all these factors to improve the performance of the company (Kumar et al., 2013). Conclusion It has been recognized from the above discussion that sales of the company are in increasing trend and the receivables of dues are in compliance with the sales value. Further, the payments for the purchases are in compliance with the increasing trend of the purchase. Therefore, the collection as well as the payments of the dues is managed by the company efficiently. The operating margin of the company is better as compared to the competitors as well as the industry average. However, the financial analyst shall take necessary steps to improve its receivable cycle, inventory turnover and asset turnover ratio to improve the performance of the company. References Ahmed, A. S., Duellman, S. (2013). Managerial overconfidence and accounting conservatism.Journal of Accounting Research,51(1), 1-30. Chiu, M.C. Okudan, G. (2014). An investigation on the impact of product modularity level on supply chain performance metrics: an industrial case study.Journal of Intelligent Manufacturing,25(1), pp.129-145. Demski, J. (2013).Managerial uses of accounting information. Springer Science Business Media. Edmonds, T. P., Edmonds, C. D., Tsay, B. Y., Olds, P. R. (2016).Fundamental managerial accounting concepts. McGraw-Hill Education. Farris, P., Bendle, N., Pfeifer, P. Reibstein, D. (2015).Marketing metrics: The manager's guide to measuring marketing performance. FT Press. Kumar, U., Galar, D., Parida, A., Stenstrm, C. Berges, L. (2013). Maintenance performance metrics: a state-of-the-art review.Journal of Quality in Maintenance Engineering,19(3), pp.233-277. Marr, B. (2015).Big Data: Using SMART big data, analytics and metrics to make better decisions and improve performance. John Wiley Sons. Weygandt, J. J., Kimmel, P. D., Kieso, D. E. (2015).Financial Managerial Accounting. John Wiley Sons.