Financial Statement Analysis Of ABC Company

Risks faced by the company

The main objective of this assignment is to analyse and forecast the business costs and cash inflows of the ABC Company. The company is engaged in manufacturing Cedar roofing and siding shingles. The company is planning to introduce a new product line which will be requiring additional funds and raw materials. For this the business will be requiring more funds and the costs of the business will also increase marginally. The assignment requires the management to make a decision whether the new product line is affordable or not. The assignment will be forecasting the cash flow statement of the company and recommend measures how the company can improve the cash flow statement (Kirkham, 2012).

The company is engaged in manufacturing business and naturally faces certain risks which are associated with the business. The business faces risks from potential competitors which are engaged in similar business (Esteves, Franks & Vanclay, 2012). The market is ever changing and thus for businesses in order to survive they must prepare strategies on the basis of which the business can survive and acquire competitive advantage. One of such strategies is diversification of the product line of the company. There is always risks of potential rivals coming up with innovative products and thus making the product of the company obsolete. Another risks which the company faces is that of liquidity requirements. The company is in need of liquid cash in order to finance the day to day expenses of the company. Such liquidity requirements of the company can be done either by the use of equity shares or using deb capital as a source of finance (Greenhill, Prizzon & Rogerson, 2016). If the company opts for debt source of capital than such will also increase the risks associated with the same. Moreover ABC Company faces certain inherent risks which are related with technological changes over time, inefficient labour management. The major risks which the company faces is from the competitors as there is intense competition in the market to acquire as much market shares as possible. The competition in the industry is intense due to the innovation changes which are continuously occurring and different strategies which are adopted by rivals companies in order to gain competitive advantage.

As per the Cash Flow Statement of the company the main sources of the funds for the company is by the issue of equity share capital and taking a loan. The two choices which are available to the company for sourcing its credit requirements are equity financing and debt financing (Maravas & Pantouvakis, 2012). The cash flow statement is given below:

Cash Flow Statement for the year




Cash flow from operating Activities

Sales Revenue

 $  1,200,000.00

Purchase of Supplies

 $   (500,000.00)

Salary to Support Staffs

 $      (80,000.00)

Wages to Labor

 $      (40,000.00)


 $      (20,000.00)

Telephone & Internet

 $      (15,000.00)

Stationery Charges

 $      (35,000.00)

Legal Fees & Registration

 $      (10,000.00)

Software Installation

 $      (10,000.00)

Rent for Office Floor

 $      (60,000.00)


 $      (30,000.00)


 $      (40,000.00)

Cleaning Charges

 $      (10,000.00)

Misc. Expenses

 $      (10,000.00)

Commission on Sales

 $        (5,000.00)

Tax Payment

 $   (300,000.00)

Total Cash Inflow/Outflow from Operating Activities (A)

 $      35,000.00

Cash Flow From Investing Activities

Purchase of Equipment

 $   (500,000.00)

Motor Vehicles

 $   (200,000.00)

Office Equipment

 $      (50,000.00)

Sales of Machinery

 $        50,000.00

Total Cash Inflow/Outflow from Investing Activities (B)

 $ (700,000.00)

Cash Flow From Financing Activities

Issue of Shares

 $      600,000.00

Loan from Bank

 $      300,000.00

Interest Expense

 $      (65,000.00)

Total Cash Inflow/Outflow from Financing Activities (C )

 $    835,000.00

Total Cash Inflow/Outflow (A+B+C)

 $    170,000.00

Add: Opening Cash balance

 $      30,000.00

Net Cash Inflow for the year

 $    200,000.00

Cash Flow Statement Analysis

As per the cash flow statement the company relies more on equity source funding as the company has further issued equity shares to accumulate $ 600000. The company has also used debt capital as shown in the cash flow statement of $ 300000 which is relatively of lesser amount as compared to the equity capital as used by the company. The company is using the capital which it collects to finance the purchase of machinery and other equipment. It is also used for the day to day financing of the business (Park & Jang, 2013). The company uses equity capital mostly in order to reduce the overall risks which the company faces. The company however has low cash from operating activities which is shown as $ 35000 which can be improved if the management of the company control the operational activities of the business. The company needs to reduce the costs such as electricity, wages, cleaning, advertisements and other similar expenses.

The new project which is opening a new product line as per the decision of the company need to be financed by the company by either use of equity capital or debt capital. It would be preferable for the company if the company uses debt capital to finance the requirements of the new project.  As the management of the company has already issued share for collecting huge amount of capital during the year as shown in the cash flow statement, the company can use debt capital to create a favourable capital structure. Moreover, with the use of debt capital the company can take advantage of leverages and also the cost effectiveness which debt capital has to offer. The company can issue debenture or take a term loan for financing the new project.

Statement showing variable costing


Cedar Roofing and Siding Shingles

Cedar dollhouses



Sales (A)

 $                                          12,00,000.00

 $         7,00,000.00

Variable Expenses:

  Variable cost of goods sold

 $                                             3,00,000.00

 $         2,50,000.00

  variable selling overhead

 $                                             1,00,000.00

 $             50,000.00

Factory Overhead

 $                                             1,50,000.00

 $             50,000.00

Total Variable Expenses (B)

 $                                             5,50,000.00

 $         3,50,000.00

Fixed Expenses (C )

 $                                             2,00,000.00

 $         2,00,000.00

Net Profit/loss (A-B-C)

 $                                             4,50,000.00

 $         1,50,000.00

Statement showing Absorption costing


Cedar Roofing and Siding Shingles

Cedar dollhouses




 $                                          12,00,000.00

 $         7,00,000.00

Cost of goods sold

 $                                             5,00,000.00

 $         4,50,000.00

Gross Margin

 $                                             7,00,000.00

 $         2,50,000.00

factory overhead

 $                                             1,50,000.00

 $             50,000.00

Selling Overhead

 $                                             1,00,000.00

 $             50,000.00

Net Profit/loss (A-B-C)

 $                                             4,50,000.00

 $         1,50,000.00

As per the above tables which shows variable costing and absorption costing it is estimated that the company will be earning a net profit of $ 150000. The expenses of variable nature are shown as factory overhead, selling overhead and variable cost of goods sold (Fisher & Krumwiede, 2012). The introduction of the new expansion product will be requiring certain amount of costs, however the new expansion product will increase the overall revenue which the company earns. The selling price per unit of the new product is estimated and shown in the table below:

Statement showing product cost for the new product


Cedar dollhouses

Variable Cost  per unit

 $                                                         70.00

Fixed cost per unit

 $                                                         20.00

Total cost per unit

 $                                                         90.00

Profit @ 40%

 $                                                         36.00

Selling price per unit

 $                                                      126.00

Statement Showing Gross contribution Margin



Cedar Roofing and Siding Shingles

Cedar dollhouses


 $                                          12,00,000.00

 $         7,00,000.00

Variable costs

 $                                             5,50,000.00

 $         3,50,000.00

Gross Contribution Margin

 $                                             6,50,000.00

 $         3,50,000.00

Fixed Costs

 $                                             2,00,000.00

 $         2,00,000.00


 $                                             4,50,000.00

 $         1,50,000.00

Statement Showing Breakeven point as per units


Cedar dollhouses

Total fixed Cost

         $             2,00,000.00

sellingt price per unit

$            126.00

Breakeven point in units


Net Present Value (NPV) Analysis is used by the companies to determine the financial viability of a project on which the company is making an investment. It is a technique which is used in capital budgeting for determining the profitability of a project (Feuz & Ritten, 2017). In this case ABC Company is planning to purchase a new equipment which will be costing the company $ 42000 and the company will derive cost reduction benefits from the use of the equipment over the period of 5 years as estimated by the management. The net present value analysis for the equipment is given below in a table format:

Statement showing Net Present Value Calculation


Cost Savings

Discount rate @ 12%

Discounted Cash inflows

Year 0

 $                  –   


 $                                            –   

Year 1

 $  15,000.00


 $                            13,350.00

Year 2

 $  13,000.00


 $                            10,400.00

Year 3

 $  10,000.00


 $                               7,100.00

Year 4

 $  10,000.00


 $                               6,400.00

Year 5

 $     6,000.00


 $                               3,420.00

Total Cash Inflows

 $                            40,670.00


less: Cost of Equipment

 $                            42,000.00


 $                             -1,330.00

As per the analysis as shown above the net present value of the company is negative which implies the cost associated with the product is more than the future estimated benefits and thus the management of the company should not buy the equipment (Pasqual, Padilla & Jadotte, 2013).

If the depreciation is charged on a straight line basis on the machinery than the factory overhead cost of the company will increase which will increase the overall cost of production and ultimately the selling price of the product of the company (Ibarra, 2013). This will negate partially the benefits which were to be brought by the new expansion product. The effect on the cash flows of the company will be similar. As depreciation is charged on a fixed amount in straight line basis the operating costs will increase and thereby reduce the operating profit of the company. However such effect will not be reflected in the cash flow statement of the company as depreciation is non cash transaction (Warren Jr, Moffitt & Byrnes, 2015).

As per the NPV analysis for the purchase of the new equipment and the cost benefits associated with it, will not outweigh the costs of the equipment in present value and thus the company should invest in the equipment. The analysis of NPV considers both projected cash inflows and time value of money principle and thus it is an effective tool for analysing the worthiness of an investment (Espinoza, 2014). The investment in the equipment will be bad choice as the NPV analysis clearly indicates that the resultant figure of NPV of the project is in negative.


As per the analysis of the entire project the major areas where risks can be identified are proper implementation of the structure for new expansion product line, liquidity issues, costs issues and other minor risks. As the company is diversifying in a new product line, at initial stages the management may face risks which are associated with management of resources and initial startup costs. Another problem which may arise is the financing problems for the new product line as the initial startup cost is expected to be a bit high and the company will be facing situation where large amount of funds are required for smooth operations of the business. The level of costs of the new product line might exceed the estimated benefits which the management had forecasted previously.

The responsibility of a controller or management accountant is to ensure that the funds are allocated as per the budget and no funds are left ideal or utilized for non-productive activities. Moreover the controller needs to supervise the activities of production and also refer to the variances which are not as per the budget. Therefore from the analysis it can be recommended to the CEO of ABC Company that the company should adopt the product expansion strategy as it will give a competitive advantage to the company and the management should use debt capital to finance the same as this will be cost effective source of financing.


Espinoza, R. D. (2014). Separating project risk from the time value of money: A step toward integration of risk management and valuation of infrastructure investments. International Journal of Project Management, 32(6), 1056-1072.

Esteves, A. M., Franks, D., & Vanclay, F. (2012). Social impact assessment: the state of the art. Impact Assessment and Project Appraisal, 30(1), 34-42.

Feuz, B., & Ritten, J. (2017). Net Present Value: NPV. Agricultural Experiment Station, University of Wyoming.

Fisher, J. G., & Krumwiede, K. (2012). Product costing systems: Finding the right approach. Journal of Corporate Accounting & Finance, 23(3), 43-51.

Greenhill, R., Prizzon, A., & Rogerson, A. (2016). The age of choice: developing countries in the new aid landscape. In The Fragmentation of Aid (pp. 137-151). Palgrave Macmillan, London.

Ibarra, V. C. (2013). The straight-line depreciation method used by selected companies and educational institutions in the Philippines. Journal of Modern Accounting and Auditing,9(4), 480.

Kirkham, R. (2012). Liquidity analysis using cash flow ratios and traditional ratios: The telecommunications sector in Australia. The Journal of New Business Ideas & Trends,10(1), 1.

Maravas, A., & Pantouvakis, J. P. (2012). Project cash flow analysis in the presence of uncertainty in activity duration and cost. International journal of project management, 30(3), 374-384.

Park, K., & Jang, S. S. (2013). Capital structure, free cash flow, diversification and firm performance: A holistic analysis.International Journal of Hospitality Management, 33, 51-63.

Pasqual, J., Padilla, E., & Jadotte, E. (2013). Equivalence of different profitability criteria with the net present value.International Journal of Production Economics, 142(1), 205-210.

Warren Jr, J. D., Moffitt, K. C., & Byrnes, P. (2015). How Big Data will change accounting. Accounting Horizons, 29(2), 397-407.

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