Acc 400 Week 5 Team Paper

BYP 13-7

Memo

To: R.J. Falk, Venture Electronics CEO

From: Mary Brokaw

Date: 4/13/2011

Re: Explanation of basis for financial statement analysis

Per your request, this is an explanation of financial statement analysis.

The different types of financial analysis are the intra-company basis, inter-company basis, and the industrial averages' basis. By comparing different aspects of Venture Electronics' current financial statements with those same aspects on previous financial statements, it is possible to observe trends in various aspects of the business such as sales and costs. This is known as a horizontal analysis. This type of analysis is performed solely within your company.

When each of the items in the asset, liability, and equity portion of the balance sheet are listed in percentages, this is knows as a vertical analysis.

To observe change over time, a base period (previous year) is chosen and compared with the current year and possibly other years between. A ratio comparing the change over the period of time provides a way to measure the trend(s). If you subtract the base year amount from the current year amount and divide that number by the base year amount, you will arrive at the change since base period percentage. To further examine the findings, the current results in relation to base period ratio can be helpful. To find this ratio, simply divide the current year amount by the base year amount are listed as percentages of the whole category.

With the ratios, comparisons can be made to study how Venture Electronics compares to other companies during the same time frame. It is then possible to compare trends between companies.

Companies like Standard and Poors will analyze and report on the industry averages using this information. Investors use this information and executives stay abreast of this information to aid them in interpreting trends and making comparisons between their companies and the industry averages.

There are limitations to these types of analysis. Financial statements may not indicate unusual circumstances within a company for a given period of time. When comparing two establishments that prepare and sell hamburgers, one company may offer free delivery and the other may not offer delivery at all. That one aspect can have a huge affect on market share and volume of business. The business that offers free delivery may be able to charge higher prices because of the convenience they offer the customers through the delivery service. At first glance it may seem that the financial statements are comparisons of similar companies offering similar products and services. In this example, that is not the case. However analysis based on the financial statements is the most commonly used method of studying information for the purpose of decision making. Managers make decisions for their companies and for their departments based on trends and forecasts. They make decisions about how to allocate and use resources. Investors also use this information when deciding where to invest surplus income.

Exercise 23.10

The flexible budget at the 70,000-unit and the 80,000-unit levels of activity is shown below.

Complete the flexible budget at the 90,000-unit level of activity. Assume that the cost of goods sold and variable operating expenses vary directly with sales and that income taxes remain at 30 percent of operating income.

Exercise 23.12

William George is the marketing manager at the Crunchy Cookie Company. Each quarter, he is responsible for submitting a sales forecast to be used in the formulation of the company's master budget. George consistently understates the sales forecast because, as he puts it, "I am reprimanded if actual sales are less than I've projected, and I look like a hero if actual sales exceed my projections."

Question A: What would you do if you were the marketing manager at the Crunchy Cookie Company? Would you also understate sales projections? Defend your answer.

Answer: I would use the behavioral approach when submitting the sales forecast because it creates reasonable and achievable goals, unlike the total quality management approach that creates goals based on absolute efficiency. If all departments of the company perform with reasonable efficiency, the goals set forth in the forecast should be achievable.

Question