Applied Finance Management Income Statement

Question: Discuss about theApplied Finance Managementfor Income Statement. Answer: Introduction Report presented here deals with the preparation of the projected financial statements for Ajay Trivedi Pty Ltd for the period from January 2016 to June 2016. The projections are prepared taking as base the historical financial data of the company and considering the future requirements. Income Statement The income statement showing month wise position of the companys profitability from January 2016 to June 2016 is presented in the appendix-1. The income statement has been prepared considering the following major assumptions: The contracts revenues have been assumed to be increasing at a rate of 10% month over the amount of the previous month. The gross profit margin has been kept between the ranges of 45-50%. The operating expenses such as depreciation, salary and wages, and telephone etc have been assumed to be increasing at a rate of 10% per month. Balance Sheet The balance sheet of the company showing month wise position of the assets and liabilities of the company has been presented in appendix-2. The projections included in the balance sheet cover current assets, fixed assets, current liabilities, long terms liabilities, and owners equity. It has been assumed that with the increase in the business, the assets and liabilities will increase month by month. The major assumptions made in preparing the balance sheet are listed below: The current ratio has been kept more than 5:1. The acid test ratio has been kept at more than 1:1 Further, the solvency ratio has been maintained at more than 20% through all the months of projection. It has been assumed that the assets and liabilities will increase by 10% each month over the previous month. Cash Budget The cash flow statement showing the cash receipts, payments, and available balance for each month from January 2016 to June 2016 has been presented in appendix-3. The major assumptions made out in respect of preparation of the cash estimations are listed as below: The ending balance has to be maintained enough to cover the payment of current liabilities of the ensuing month. The payment to suppliers and for expenses is assumed to get increased at the rate of 10% each month. The company will repay the bank loan from April onward in monthly installments of $30,000. Comment on Critical Ratios The ratios considered critical in evaluating the financial performance and position of the company have been presented in appendix-4. As regards the profitability, the net profit margin, gross profit margin, and return on equity show that company earnings are very high. Further, high current ratio and acid test ratio indicates good position as regards liquidity (Tracy, 2012). The equity ratio and debt to equity ratio indicates that the solvency risk is low as the company is using more equity than debt (Gibson, 2012). References Gibson, C.H. 2012. Financial Reporting and Analysis. Cengage Learning. Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.