After the first year of operations our two companies are compared to see how their choices led them. Looking at the financial statements tells us a few things.
1.) Both companies had a positive net income meaning the years operations were accounted for
2.) Both companies generated a positive cash flow adding to the cash on hand
3.) Both companies declared a dividend and the initial investors received money back
4.) Even after paying off our dividends we are left with money in retained earnings
Due to the difference in allocating costs in different methods approved by GAAP and IFRS we can see that the company’s assets, liabilities and expenses were incurred differently. This created a difference in the company’s profitability in respect to Net Income, Glenwood - $ 92480 and Ead – 71753. The difference also challenged retained earnings after dividends. Glenwood - $69280 EAD- $48553. Four differences had caused our changes:
1.) How we accounted for our accounts receivables uncollectable 1% vs. 5%
2.) The way we measured our inventory, FIFO vs. LIFO
3.) The way we amortized Double Decline vs. Straight Line
4.) The payment of our equipment Rental vs. Lease
Even though there is difference in the ways accounted for and the outcome, both companies have their reasoning and in the future will pay them back for what they have not earned. We can see that depreciation is the main reason that caused net income to decrease for EAD because of the double declining balance, however in a few years you will see that rate decrease and bring back lost profit.
What this company has proven to us is that operating 365days a year the company is able to turnover its inventory, collect its payments pay its debt and take care of its yearly operating expenses. The company has bared a lot of debt due to the first year of operations. But if the company was to operate in the same manner as it is then it is not doubtful it can continue operations, pay back its notes payables, equipment and investors will keep getting a dividend.
So our four financial statements tell us:
1.) Both companies gained a net income
2.) Both companies has a positive cash flow
3.) Both companies have accounted for assets and liabilities correctly
4.) Both companies have paid dividends and generated a retained earnings
Our ratios are the next tool that will help us analyze the productivity of this company. Our statements have proven to be great and investors would see potential in this company.
When we look at our current ratio for both companies, they both tell us that our liquid assets are more than enough to pay off our most relevant debt. Our assets which can turn into cash or are already cash can pay off our liabilities that have to be paid off within the year. If the company goes bad this is great, we can pay off our current liability and take some time to think about what to do with the rest.
The quick ratio is current assets minus our inventory. We still see the same result as current ratio. Our liquid assets will be able to cover our current liabilities and a bit more.
In terms of our creditors paying us back, the accounts receivable turnover ratio told us Glenwood and EAD both had 4. This indicates that our cash and collections are both efficient. Our current A/R is four times smaller than the credit sales throughout the year.
Accounts receivable days to collect, shows us it takes 90days for Glenwood and 87days for EAD to collect there average accounts receivable.
Inventory turnover the lower ratio implies poor sales and excess inventory, and high implies the opposite. The difference in the companies occurred due to the allocation of COGS.
Days to sell inventory Glenwood is selling its average inventory on about 129days and 99days for EAD. Both good effective numbers to keep on moving. Keep in mind that sales were the same for both companies. It all came