Common Size Analysis (Vertical and Horizontal)

It is clear from the horizontal analysis that there is an increase in overall assets and liabilities and owner equity figure. The retained earning and long-term liabilities has increased and the capital reserves and issued shares remained the same. The increase in retained earning and long-term debt shows that the company wants to invest more in the business this year. He inventory has decreased and the receivables have also decreased that shows company’s efficiency in covering the receivables and selling the stock.

It is clear that the sales of the company have increased than the previous year that may be due to decrease in sales discounts and commission. Operating income has also increased showing increased efficiency in operations and reduced operation costs. The other income has played a significant role in 2004. It may be due to gain on sale of some asset or unexpected gain. The amount of tax has increased in 2005. All these factors have reduced the increased operating income effect on net sales and net sales have reduced.

The days receivable indicate the length of the time that has been outstanding at the end of the year. Packages ltd have days sale of receivable of 39 days in 2005 and 40 Days in 2004 which indicates that packages ltd converted its sale into net income quickly in 2005 then in 2004. This may be changed due to seasonal sale or change in sale for any other reason. To remove this fact we take the gross receivables.

Account receivable turnover indicate the liquidity of the receivables. This shows how easily company can liquidate its receivables. Packages ltd has liquidity of 9 times in 2005 and 9.33 Times in 2004. Account receivable also change due to the change in sale for different reason like seasonal fact. Companies can use the sale for different moths to overstate or understate the liquidity of receivable, but account receivable turnover use the average of gross sale. Liquidity of receivable for the companies varies according to nature of the business of that company.

The day’s sales in inventory estimate the number of days that it will take to sell the current inventory. Due to different reason estimate may be vary. The cost of goods sold figure is based last year’s sales, same divided by the number of days in a year. Ending inventory may also differ due to the by using different methods for inventory. The packages ltd has day’s sales in inventory 73 days in 2005 and 85 days in 2004.

In inventory turnover show the time, in which it will convert, the current inventory into sales. For inventory turnover in days we use average inventory to eliminate the change variation due to the change of sale. Packages have suitable inventory turnover.

Inventory turnover in days is for the estimation of the number of days that it will take to sell the current inventory. Formula is same as of day’s sales in inventory. But in inventory turnover in days we use average inventory.

Solution:
Operating cycle represent the period of acquisition of goods and conversion of the good into cash. It is higher for the companies like Packages ltd. Because the company purchase raw material converts it in to product then it sells it to whole seller. All process increase the operating cycle.

Working capital of a business indicates of the short run solvency of the business. This show how easily firm can pay the short-term loans.

Current ratio also determines the short-term debt paying ability of the firm. Its ability is increased in 2005 as compare to 2004 because ratio is increased.

Acid test ratio includes the only most liquid items of the current assets. Acid test ratio may decrease from 1. Packages ltd is manufacturing unit. For such like company acid test ratio must be round about the 1. But Packages ltd has acid test ratio 1.20 in 2005 and 0.45 in 2004 although it increased in 2005 but enough. Means Packages can easily meet all its current liability with its most liquid asset. It should manage through the sale of inventories.