· produced over a period of time, usually

Income Statement – This is a statement produced
over a period of time, usually a financial year but can be generated for any
time period. It shows what profit or loss the business has made in the
specified time. The statement will include income and expenses for the business
and indicate profit before and after taxation. You can use the income statement
with the balance sheet to produce the percentage equity levels that the company
are at which potential buyers would look at.

Balance Sheet – This is a statement of the
current position of the financial recourses, obligations and net worth of a
business. The balance sheet gives you a picture of the accounts just before the
report is produced but no earlier. This statement can give shareholders a view
of whether a business would be in a position to pay all its obligations if
needed showing if there is any risk to the shareholders investment.

Cash Flow Statement – This statement shows the
cash balance of a business, where profits have gone and why they haven’t been
turned into cash over a period of time. It shows in more detail than the income
statement how the cash has been generated and consumed. Like the income
statement the Cash Flow statement acts as a bridge between 2 balance sheets.
This can be useful to the board to as it can show risks in regard to long term
cash decline and the company’s ability to pay liabilities.Starting with the income statement I would say the main
areas of concern would be the profit percentage decrease, increase in inventory
and the large increase in marketing costs. ·        
increased £18,396k 20%·        
Marketing has increased by 32% which is a large
increase without knowing if this has been responsible for increased sales.·        
Opening inventory has increased by £1,078k, 20%
which is quite significant·        
Closing inventory has increased £2,546k, 40% a
large increase on the previous year·        
Gross Profit has decreased from £48,928k to £48,162k
a difference of £766k, 1.6% meaning the gross profit margin has decreased 10
percentage points from 55% to 45%·        
from wholesalers increased 20,630k 50% and 21,708k 47%·        
have gone up but gross profit decreased – are they charging lower prices? (Is
the high end furniture selling at the right price?) Can they not sell the level
of furniture they hold?·        
have from 16,154k to 17,562k but the percentage of this from the sales is
actually decreased from 18.3% to 16.4%  Moving onto concern growing from links between the income
statement and the balance sheet we can see the business equity had reduced and
customers are taking longer to pay for orders. Also there is a significant
increase in the inventory stored.·        
Business equity stands at 26% down from 35% the
previous year, taken from profit before taxation and total equity
(28,514/108,593 x 100) (31,003/85,782 x 100) a difference of 9 percentage
points – this decrease would not be beneficial for potential investor’s ·        
Average days taken for receivables to be paid has
increased from 6.6 days to 13.8 days and increase of 109%, meaning there is a
significant of money owed into the company. ·        
Seem to be holding a lot of inventory still
6,246k last year to 8792k, an increase of 2546k 40.7%  Lastly looking at the cash flow statement the main major
area of concern would be the long term risk if the cash balance continues to
decrease as a lot of the money seems to be in inventory and owed by customers.
A question would also need to be asked is why there was such an increase in
inventory and receivables.·        
Inventory has gone up by £1468k an increase of
Receivables has gone up by £1967k an increase of

Operating Profit decreased from £29,725k with an
operating profit margin of 33.6% to £27212k with an operating profit margin of
25.5% a reduction of 8.1 percentage pointsI would say that Clare’s parents concern is justified, from
looking at the financial statements and assessing the areas of concern they are
right to question the financial director. The financial director advised Clare
that to expand the business to ‘invest particularly in buying goods with a
higher profit margin and to spend more on marketing’. Looking at the figures
for inventory and sales I would question why there is still a big proportion of
inventory stored and even though the sales have increased based on the previous
year the gross profit has decreased. I would advise Clare to look at the
consumer demand for the stock and whether they are selling at the right retail
prices or is it too low as this may explain the reduction in profit. With the
marketing aspect this has increased by 32% which is a large increase to make
without knowing if this is bringing in enough sales to cover it, I would advise
to re look at this and take it back then gradually increase marketing gaging
interest and sales with each increase.

More detailed management accounts would be
needed for further assessment.

Conduct some market research on the ‘higher
profit margin’ goods

Have payables rates increased?

Has Clare agreed a longer payment plan with

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