Depreciation Method Analysis
Analysis of the company income and the sales volumes in the context of the yearly changes and the dynamic development of the price policies is an integral part of the accounting analysis. It should be stated that the depreciation method, which will be used for analyzing the financial flow of the company.
Originally, the depreciation expenses are calculated in accordance with the following formula:
Depreciation Expense = Total Assets – Total Liabilities / life span
The method of depreciation which is used is Straight-line Depreciation. Originally, it is the simplest, and the most widely used technique in the business sphere, nevertheless, it requires stable lowering of the price, i.e. keeping the same percentage of depreciation. In the light of this perspective, it should be emphasized that the original values and reported earnings are overstated in the reports. 39,07% of a yearly depreciation is not a dangerous indicator, thus, the company may lose an excellent opportunity for further development, as the constant increase of the depreciation rate may violate the stability of the further financial development. Originally, it will be shown in the following part of the analysis. Nevertheless, there will be a strong necessity to take into consideration the fact, that the depreciation rate tends to increase, while it should stay at the same level. The following analysis will reveal the financial ratios, for the deeper insight into the business performance was possible.
Standard Financial Statement
ROE
Return on Equity = Net Income/Shareholder’s Equity
ROA
ROA = Net Income + Interest Expense – Interest Tax Savings / Average Total Assets
ROS
ROS = Net Income / Sales
GMR
Quick Ratio
Quick Ratio = Cash + Marketable Securities + Accounts Receivable / Current Liabilities
Current Ratio
Current Ratio= Current Assets / Current Liabilities
Inventory Turnover
Inventory Turnover = Sales / Inventory
Accounts Receivable Turnover
A/C Turnover = Unpaid Credit Sales / Total Credit Sales
Originally, this information is not available in the provided case study, consequently, this ratio is impossible to calculate.
Assets Turnover
Assets Turnover = Revenue / Assets
Summary
First, there is a strong necessity to emphasize that the calculated ratios represent the stable development of the company, and reveal accurate and proper financial management. On the one hand, the success in the matters of financial accounting and the factors, associated with depreciation is considered to be the reason for a favorable economic environment. On the other hand, the ROS ratio, as well as GMR are not satisfying, as the numbers are decreasing, and, it should be emphasized that the following tendency will probably appear to be less satisfying.
All the other ratios, which are regarded in the analysis represent the unstable development of the business performance, as the majority of the financial ratios and indicators reveal the decline of business. Assets, sales, and revenues are getting lower, while the liabilities increase. Surely, the increase in the liabilities is proportionally lower than the decrease of the assets and incomes, nevertheless, the ratios, which reveal the relations between assets and expenses reveal the dissatisfying tendency.
Moreover, it should be highlighted that the analysis of the ratios revealed the decrease in the sphere of sales, while the assets are increasing. Originally, this tendency defines that the business sector is losing its profitability points, and, to survive the company will have to extend its business performance and perform the diversification of marketing activity. Nevertheless, in the circumstances of the lowering ratios, this will be rather difficult.
The company should pay extensive attention to the issues of improving the financial aspect of the business through providing a thorough control for the other spheres of business: HR management, marketing performance, advertising, and production management. In the financial sphere, the company will have to decrease the expenses and the costs of the production for improving the financial tendencies and achieving higher rates.
Bibliography
McWatters, C. Zimmerman, J Management Accounting: Analysis and Interpretation. Prentice Hall, 2008.