|Nybrostrand Company |
For the year ended December 31, 2014
|Cost of goods sold||307,000|
|Total expenses||(160 350)|
|Net Profit||118, 650|
|Nybrostrand Company |
As of December 31, 2014
|Current Assets||Current Liabilities|
|Inventory||34,000||Long Term Liabilities|
|Total Assets||515,500||Total Liabilities and Owners’ Equity||515, 500|
|Working retained earnings|
|Balance in the trial balance (missing figure)||131,850 (balancing figure)|
|Current retained earnings||118,650|
|End of year retained earnings||250,500|
From the financial statements above, the company has generated profits. This is an indicator the company is utilizing its resources effectively to generate profits. Moreover, the company has been able to minimize the cost of goods sold in order to report high profits.
The company reported positive revenues in the previous year. This information can be obtained from the retained earnings carried forward. In 2013, the company had retained earnings of $131, 850, which is an indication that the company had been reporting high revenues the previous years. When a company is generating adequate returns, it is able to expand its business operations faster and pay high dividends.
When a business is making profits, managers are able to save enough capital to invest in new profitable ventures (Werner & Stoner, 2010, p. 34). For instance, the company has high retained earnings that can be used to acquire new assets or businesses that would enable the company to increase revenues. However, high retained earnings might be a signal that the company does not pay high dividends. It is the duty of the executive to determine the number of revenues to be paid out as dividends. However, in some cases, managers might decide to distribute revenues as dividends to acquire new businesses or for future expansion. Ideally, the high-retained earnings indicate that managers are planning to expand the operations of the company (Zelman, 2003).
From the statement of financial performance, depreciation represents a significant expense which is an indicator that the company is charging a high rate of depreciation on its assets. The statement of financial position shows that the company does not own many assets. This is an indication that the company is operating in the service industry (Whittington & Delaney, 2008). Ideally, companies in the service industry usually own few assets compared to those in the manufacturing industry (Besley & Brigham, 2015, p. 67). A critical analysis of the balance sheet shows that the company has very high-retained earnings, which is even greater than paid-in-capital. This figure indicates that Nybrostrand uses most of its retained earnings to finance day-to-day operations (Mayo, 2012, p. 425).
The amount of common stock is $10,000 which is an indicator that the company does not depend on shareholders’ capital to finance major projects. Therefore, it shows that the firm uses its retained earnings to finance major projects. However, this is not a strategic way of financing projects because equity capital is less expensive (Banks, 2015, p. 109). The company is able to raise more money by issuing shares which can be used to finance more projects.
Although retained earnings are less expensive, equity capital can be used to raise more money to finance additional projects. Retained earnings cannot be used to finance projects that require huge investments because the company will run out of money. It is important for managers to consider equity finance rather than use retained earnings because it will not be easy to acquire. In summary, Nybrostrand is profitable and has a stable statement of financial position.
Banks, E. (2015). Finance: The basics. Milton Park, Abingdon, Oxon New York: Routledge, Taylor & Francis Group.
Besley, S., & Brigham, E. (2015). Cfin4. Stamford, Conn: Cengage Learning.
Mayo, H. (2012). Basic Finance: An introduction to financial institutions, investments, and management. Mason, OH: South-Western.
Werner, F., & Stoner, J. (2010). Modern financial managing: Continuity and change. St. Paul, MN: Freeload Press.
Whittington, R., & Delaney, P. (2008). Wiley CPA exam review 2008. New York: John Wiley & Sons.
Zelman, W. (2003). Financial management of health care organizations: An introduction to fundamental tools, concepts, and applications. Malden, MA: Blackwell.