Profit and Loss Instructions: 1. Using Microsoft Excel formulas ✓ Solved

Using Microsoft Excel formulas, calculate a horizontal and vertical analysis for the first three months of QB Cloud’s operations for the profit and loss.

Address the following questions:

  • 1a. Identify and explain three horizontal analysis items that are not 0%.

  • 1b. Identify and explain three vertical analysis items that are not 0%.

  • 1c. Which expenses seem to be appropriated only to certain months? Do you believe this is the correct application or should they be appropriated differently? Why or why not?

Using Microsoft Excel formulas, calculate a horizontal and vertical analysis for the first three months of QB Cloud’s operations for the balance sheet.

Address the following questions:

  • 2a. Identify and explain three horizontal analysis items that are not 0%.

  • 2b. Identify and explain three vertical analysis items that are not 0%.

  • 2c. Do you think the short timeframe being measured here impacts the reliability of your analysis? Why or why not?

Using Microsoft Excel formulas, calculate the following ratios for QB Cloud and interpret the results:

  • Debt Ratio

  • Current Ratio

  • Profit Margin

Interpret the results of the ratios.

Paper For Above Instructions

The analysis of financial statements is crucial for assessing the performance and financial health of a business. In this paper, we will carry out both horizontal and vertical analyses for QB Cloud's Profit and Loss statement and Balance Sheet for the months of October, November, and December. Additionally, we will interpret specific ratios and address the related questions presented.

Profit and Loss Horizontal and Vertical Analysis

For the horizontal analysis, we examine the changes in amounts for each line item across the three months, which allows us to understand trends and growth patterns. The horizontal analysis for October to December shows the following key points:

  • Sales: Sales grew from $6,000 in October to $13,220 in December, representing a substantial increase. This indicates an upward trend in sales, which is positive for the company's revenue generation.

  • Cost of Goods Sold (COGS): COGS also increased from $0 in October to $6,610 in December, reflecting the growing level of sales. This demonstrates that the company is scaling its production or services in line with its increased sales.

  • Total Expenses: The total expenses significantly increased from $1,562.44 in October to $9,026.07 in December. This increase warrants close examination as higher expenses can impact profitability.

Now, for the vertical analysis, proportions of items are compared to the total income for each month to assess structure within the income statement:

  • Gross Profit Margin: This was approximately 96% in October, 50% in November, and decreased to 50% in December. A decreasing margin raises concerns regarding either increasing costs or a potential reduction in pricing strategy.

  • Advertising Expenses: Advertising expenses accounted for a substantial percentage of total income each month, indicating that QB Cloud invests heavily in marketing relative to its income.

  • Utilities Expense: Utilities expressed a relatively small percentage of total expenses indicating efficient management of these costs.

In response to 1c, analyzing the expenses, we observe certain items such as Advertising ($125 in October, increasing in subsequent months) and Office Supplies ($226 in December). These expenses may be appropriated based on actual usage or business needs. If they are volatile, it would be more prudent to budget these on a quarterly basis instead of respective monthly allocations to better reflect variability and actualization.

Balance Sheet Horizontal and Vertical Analysis

Turning our attention to the Balance Sheet, we perform a similar horizontal and vertical analysis:

  • Total Current Assets: These increased from $59,437.56 in October to $66,013.52 in December. This shows a healthy growth trend in current assets, suggesting improved liquidity.

  • Accounts Payable: Accounts payable surged from $0 in October to $3,120 in December, reflecting a potentially increasing liability that needs monitoring.

  • Equity: Equity grew from $64,437.56 to $67,093.52, which is an indicator of retained earnings performance from the profitable operations observed in the Profit and Loss statement.

Vertical analysis for the Balance Sheet shows:

  • Cash and Cash Equivalents: Represented a substantial portion of total assets, reflecting strong liquidity management

  • Debt Ratio: This metric, calculated as total liabilities divided by total assets, informs stakeholders about leverage. An observed ratio suggests the majority of asset investments are via owned equity.

  • Common Stock: Consistently a significant part of equity, indicating ongoing investment into the business by shareholders.

Regarding question 2c, the short timeframe for analysis (three months) does impact the reliability. Trends may not be stable, as seasonal fluctuations or new market initiatives could distort actual performance. Analyzing a longer period would yield more reliable trends.

Ratio Analysis

The analysis of ratios evaluated from the quarterly data includes:

  • Debt Ratio: calculated from total liabilities divided by total assets, thus indicating the extent to which the company is leveraging its equity.

  • Current Ratio: Assessing current assets against current liabilities provides insight into liquidity, where a ratio above 1 suggests effective liquidity management.

  • Profit Margin: Net income divided by total revenue indicates profitability efficiency.

These ratios can guide future funding decisions, as understanding leverage and liquidity is paramount for financial sustainability.

Conclusion

In summary, horizontal and vertical analysis of the financial statements of QB Cloud provide valuable insights into performance trends, cost management, and overall financial health. By further delving into the ratios, stakeholders can understand their economic positioning and make informed decisions to steer the company toward sustained profitability.

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