Horizontal Analysis Horizontal analysis is one of the two main ways to analysis the financial statements of a business.

This analysis provides a year to year look at the financial performance of the business being evaluated. The spreadsheet that is attached provides a horizontal analysis of years 6, 7, and 8 for the balance sheet and income statement for Competitive Bikes and Two Wheel Racing. The horizontal analysis can take into account either the dollar amount of the changes over the years or the percentage of change for the years. This analysis will consider both items, and will also be comparing years 6 and 7 and 7 and 8. Year 7 The analysis of years 6 and 7 shows a positive result for Competitive Bikes. Revenue There was a positive increase in revenue for years 6 and 7. Net sales increased by $1,495,000 between years 6 and 7. This was a 33.3% increase for Competition Bikes. The cost of goods sold increased $1,048,000. This was a 31.8% increase. The fact that net sales increased by 33.3%, and cost of goods sold increased by only 31.8% was a significant factor in these two years. This was a positive result, because net sales increased more than what the cost of goods sold increased. Competition Bikes found a way to sell more bikes at a lower cost for the company. This is why the company had an increase of 37.5% in gross profit. Selling Expenses Total selling expenses increased by 33% between years 6 and 7. This was expected, because most of the selling expenses are considered variable expenses. Variable expenses are expenses that increase as production and sales increase. Sales commissions, distribution network support, and transportation out are all considered variable expenses. Knowing that net sales increased by 33.3%, and these expenses increased by 33% shows they are variable expenses. This increase was totally expected. Advertising expenses increased by 37.5% which is a little more than net sales. With the website creation and maintenance costs staying the same it helped balance out the total selling expenses with the increase in net sales. General and Administrative Expenses Between years 6 and 7 total general and administrative expenses increased by 20.4%. Including in these expenses are administrative salaries, executive compensation, employment taxes, utilities, payroll services-nonmanufacturing, research and development, depreciation expense, and other general and administrative expenses. Most of these expenses are considered fixed expenses. Fixed expenses are considered expenses that are not directly related to production and

sales. With gross profit increasing by 37.5%, and these expenses only increasing by 20.4% is a positive result. The most noticeable changes in this expense group were research and development expense and utilities expense. Research and development increased by 37.4%, and then utilities expense only increased by 3.8%. Operating Income There was a positive increase in operating income. This was expected due to the fact gross profit had an increase of $447,000, and total operating expenses only had an increase of $156,440. This represents an increase of $191,820 in operating income. This happens to be a total increase of 154.6%. This is a considerable difference between the two years. Interest Expense (Expense) There was a 38.1% increase in interest income during 6 and 7. This caused a $5000 drop in interest expense. With the increase in interest income and a decrease in interest expense it caused a decrease of 10.9% in net interest. Net Earnings After you take into considerations the provision for income taxes there was net earnings increase of $148,815. This caused an increase by 313.4% for the year. This represents a positive result for Competition Bikes. Assets You can see in the balance sheet for Competition Bikes how an increase in net sales affects the assets on the balance sheet. With the net increase of 33.3% in net sales caused an increase of 31.5% in total current assets. You can also see how the increase in sales affected cash and cash equivalents. This decreased by 64.6%. This was due to the increase in cost of goods sold. Also with the increase in sales there was an increase of 10.8% in accounts receivable. This is also a positive for Competition Bikes. Those were the two main areas that were affected in the assets area of the balance sheet. Liabilities There was a very small increase of 1.2% in overall liabilities. The major reason for this small boost was the increase of $128,820 in accounts and notes payable. The increase of 192% was tied with the increase in the volume of sales that happened during the year. Shareholder Equity

Total stockholders equity increased by $70,121. This was a 3.2% increase overall. The increase in net earnings caused an increase of 17.4% in retained earnings. You can also tell from the balance sheet the company bought back 250,000 shares of its stock. They bought these shares at $4.00 per share. This is why there was a decrease of 64.6% in the cash and cash equivalents area of the balance sheet. Overall year 7 was positive for Competition Bikes. The company shared great performance for the year. Year 8 Year 8 was not as successful as year 7 was. When looking at the horizontal analysis you can see this. Revenue Net sales decreased by 15% in years 7 and 8. This caused a decrease in gross profit. The other problem with years 7 and 8 is net sales decreased by 15%, but cost of goods sold only decreased by 14.5%. This could have been caused from several things. One reason could be based on the current economic condition. There were cut backs on funding levels for all the riders. The other thing the company needs to focus on is how to decrease the cost of goods sold more. If sales are going to decrease they want cost of goods sold to decrease by more. The company needs to look at their costs, and see where they can decrease them. This would mean looking into their vendors. Selling Expenses Selling expenses decreased by the same as net sales. This was to be expected. Most of the selling expenses are based upon variable expenses. This means as net sales decreases the variable costs should also decrease by the same amount. This shows on the horizontal analysis of the income statement. Advertising expense did decrease by a little more than the other expenses did. Advertising expenses decreased by 16.3%. This would make sense, because the company would not advertise as much due to the loss in sales. General and Administrative Expenses During years 7 and 8 Competition Bikes did manage to keep these expenses around the same as years 6 and 7. This was very important due to the fact net sales decreased by 15%. The company managed to only decrease these expenses by 1.2%. This number could have been a lot higher. There is more to see than just the total of the expenses. When looking at each expense there is a negative trend. The two major items that need to be looked at is the decrease of

$15,996 in research and development. This was a total decrease of 16.3% from the previous year. When net sales are down research and development is not the first cost that should be cut. The company should exam what factors are involved in the increase of other general and administrative expenses. This area increased by 7.6%. Operating Income/Net Earnings This area was affected negatively by the decrease in net sales. Even though the company tried very hard to keep expenses under control it was not enough. Since Competition Bikes could not keep total expenses under control net earnings before income taxes decreased by 81.8%. This ultimately caused net earnings to decrease by 84.1% or $165,007 from the previous year. This was an extremely negative result. Assets Current assets between the years 7 and 8 decreased by 2%. When you examine the balance sheet more closely you can see cash and cash equivalents increased by $321,661 which was 348.2%. It appears the company was good at collecting their accounts receivable with how much the cash and cash equivalents increased. Also it was expected for accounts receivable to decrease by 15%. This was expected due to the decrease of 15% in net sales for the year. Also accumulated depreciation decreased by 50%, so this caused only decrease of 7.8% in net property and equipment. Liabilities Total liabilities decreased by 1.9% for the year. Total current liabilities increased by $66,500. This was due to the increase of 33.3$ of accounts payable and notes payable. By looking at this number we can assume the company had a difficult time paying their suppliers. There was decrease of 5.9% in total long-term liabilities. This helps offset the increase in accounts payable and notes payable. Shareholders Equity Looking at total stockholders equity you can see there was not a significant change during the year. Total stockholders equity increased by 1.4%. There were no buy backs, and there were also no purchase of treasury stock during the year. There was a small increase in retained earnings of $31,286, and this caused an increase in total stockholders equity. Compared to years 6 and 7, 7 and 8 were not very successful at all. Vertical Analysis

Vertical analysis is a second method that can be used to analyze financial statements of a company. The vertical analysis is computed by taking the total account total, then dividing this amount by the base amount and multiplying that number 100 to get a percentage. This method will compare items related to sales as a percentage of sales, and then items related to the balance sheet compared to total assets. Years 6, 7 and 8 Revenue Net sales increased by $1,495,000 in years 6 and 7. In years 7 and 8 net sales decreased by $897,000. Even though net sales fluctuated cost of goods sold continued to stay consistent. Cost of goods sold for years 6 was 73.4%, year 7 was 72.6%, and year 8 was 73.0%. By looking at these numbers you can see that cost of goods sold is completely related to the volume of sales. This shows you that cost of goods sold is a variable expense. This is why cost of goods sold stayed consistent over the years. With cost of goods of sold being a variable expense it is expected that gross profit would stay consistent. This proved to be true by gross profit being 26.6% in year 6, 27.4% in year 7, and 27.0% in year 8. Selling Expenses Looking at the selling expenses in a vertical analysis you can also see these are variable expenses, and closely related to net sales and sales volume. This is why selling expenses were consistent at 6.7% for year 6, 7, and 8. General and Administrative Expenses When examining these expenses it can be noticed these are fixed expenses. This means these expenses will not change when net sales changes. These expenses are the ones that need to be closely watched over the years. These expenses are very important when assessing the companys overall financial performance. The first noticeable expense is in executive compensation. In year 6 this expense was 3.8% of net sales. Net sales did increase in year 7, so it was only 3.7% of net sales. In year 8 this expense stayed consistent even though net sales decreased. This caused this percent to increase to 4.3% in year 8. This expense in relation to administrative salaries caused a problem with total general and administrative expenses. Sales increased over the years 6 and 7, so the increase in these salaries can be explained. The problem is in year 8. This is because net sales decreased during the year, but these 2 salaries stayed the same. Total Operating Expense

In year 6 total operating expenses were $124,105 in year 7. They were $1,322,075, and in year 8 they were $1,273,867. Looking at these figures compared to net sales it is explained why in year 6 net operating incomes increased by 2.8%, and increased by 5.3% in year 7, and only increased by 1.9% in year 8. Net Earnings In year 6 after the provisions for income taxes net earnings increased by .9%. This made a total of $41,148 for year 6. In year 7 net earnings increased by 2.8%. This was an increase of 170,121 for year 7. These numbers fell significantly during year 8. Net earnings decreased to . 6%. This was only $31,286 for year 8. Assets

When examining the balance sheet you can see that fixed assets are a very high percentage of the total assets for Competition Bikes. The major changes noticed in cash and cash equivalents, and also in accounts receivable. Cash and cash equivalents were 6.2% in year 6. This decreased to 2.2% in year 7. Then in year 8 this amount increased to 9.7%. In accounts receivable there are also noticeable changes. In year 6 this amount was at 6.5%, in year 7 it was 16.7%, and then in year 8 this amount was at 14.2%. This shows that Competition Bikes was very aggressive at collecting accounts receivable during year 8. The company was not as aggressive during years 6 and 7. Being more aggressive in accounts receivable during year 8 has a favorable impact on the balance sheet. Liabilities The most noticeable changes in the liabilities section is in total current liabilities. This was mostly based on the increases in accounts and notes payable. In year 6 accounts and notes payable was at 1.6%. Then in year 7 this amount increased to 4.6%. This amount then increased even more in year 8. In year 8 this amount peaked at 6.1%. This happened because in year 8 the company concentrated more on collecting account receivable then paying their suppliers. This could be caused by the decrease in net sales. Total liabilities stayed pretty consistent due to the mortgage payable. This amount decreased every year, so this helped offset the increase in accounts and notes payable. Stockholders Equity When examining stockholders equity there was an increase over the years. In year 6 stockholders equity was at 52.5%, and year 7 it was at 53.0%, and then in year 8 this amount

peaked at 53.8%. This does appear to be a positive trend for stockholders equity. This amount is more related to the stock buybacks that accrued during years 7 and 8. Also the payments on the companys long term debt and mortgage payable were the main reason of this. The increase in stockholders equity was more because of those reasons than an actual increase in the companys financial health. Trend Analysis Trend analysis is a third analysis that can be done to financial statements. This analysis takes a financial item, and all the past years numbers with the same item. The first year is the base year for the trend analysis. You then calculate the percentage of each year compared to the base year. This shows a trend of the different items. In this trend analysis we are looking at neat sales. We are using year 6 as the base year. Looking at this trend we can examine the past performance and financial growth for Competition Bikes. With a trend analysis you can also estimate future items. With Competition Bikes trend analysis there is a forecast for years 9, 10, and 11. They are using year 8 for a base amount in this trend analysis. Looking at the trend analysis for competition Bikes you can see the increase in net sales for year 7, and then the decrease for year 8. In year 7 there was an increase of 133.3% when compared to year 6. In year this amount decreased to 113.3%. This show a negative trend for trend analysis. They also provided us with a forecasted trend analysis with using year 8 as a base year. Competition Bikes has forecasted there will be an increase in net sales every year compared to year 8. When looking at year 11 there is already a decrease in net sales when net sales peaked in year 7. In year 11 net sales is forecasted to be $5,681,000, and in year 7 net sales were $5,980,000. This is still in a decrease of $299,000 in net sales. There are a couple of strengths that were noticed while examining the trend analysis. Competition Bikes has made a very durable, reliable, and light weight bike frame. They have succeeded at making a very unique product in their industry. Competition Bikes have shown they can prosper when their sales are increasing. When looking at year 7 it shows Competition Bikes have had a positive increase in net sales when compared to year 6. When looking at year 8 there was a huge decrease in net sales. Year 8 was still an increase in net sales compared to year 6. When examining the trend analysis compared to year 6 the company looks very stable, and shows they have an established client base and sales level. There are also weaknesses that are shown on the trend analysis. Even though when net sales for year 8 are compared to year 6 there is an increase in sales. The major problem is there was a significant decrease from year 7 to year 8. When looking at the income statement there was no changes in the fixed cost area to help offset the decrease in sales. The only expense that was decreased was research and development. The trend analysis shows there will be an increase in

net sales every year for the next three years. The negative part to this is there are no facts or data to show this will and can be for sure. Competition Bikes had net earnings of only $31,286. The fixed costs had increased every year since year 6. This is a negative trend when net sales had decreased. Competition Bikes have not showed a stable plan to reduce fixed costs over the years. This will have a very huge impact on net earnings for the next three years if their predications are wrong. The problem is if net sales decrease over the years instead of increase like the company has forecasted. Even if net sales stay at the same level Competition Bikes will have a huge problem in year 10. If they do not find ways to reduce their fixed costs the company will operate at a loss. Competition Bikes have shown an increase in net sales for the next three years. If this data is not supported by some facts, or a plan to reduce fixed costs then this trend analysis is very negative. Current Ratio The current ratio is one of the most widely used ratios in financial analysis. This ratio is calculated by taking current assets divided by current liabilities. The ratio shows how well a company can pay their current liabilities with their current assets (Horngren, Harrison, & Oliver, 2008). The current ratio for Competition Bikes in year 7 was 5.79. In year 8 this ratio decreased to 5.25. This is a positive ratio compared to Two Wheel Racing. Two Wheel Racings current ratio for year 8 was 4.2. The 5.25 ratio shows that Competition Bikes current assets are 5 times more than their current liabilities. If this ratio is to low then it shows the company cannot pay their current liabilities with their current assets. This will show the company is not in good financial health. With a ratio of 5.79 in year 7 and 5.25 in year 8 shows the company is stable. Acid-Test Ratio Another name for the acid-test ratio is quick ratio. This ratio will tell you whether the company could pay all its current liabilities if they became due immediately. The acid-test ratio is calculated by adding cash, short term investments, and net current receivables. You then take this number and divide it current liabilities (Horngren, Harrison, & Oliver, 2008). Competition Bikes had a ratio of 4.41 in year 7, and 4.14 in year 8. Two Wheel Racing had a ratio of 3.40. The ratio of 4.41 and 4.14 is very favorable. This ratio is even better than Two Wheel Racings ratio of 3.40. This shows the company could pay their current liabilities if they all became due immediately. Average Collection Period The average collection period is the estimated amount of time that it takes for a company to collect payments owed in terms of receivables. This is calculated by taking accounts receivable divided by net sales. You then take this amount, and divide it by 365. The average collection period for Competition Bikes was 43.8 for year 7 and 8. The average collection period for Two

Wheel Racing was 32.5. Two Wheel Racings figure is a lot better than that of Competition Bikes. Even though Two Wheel Racings amount is more positive the Competition Bikes, does not mean that an amount of 43.8 is bad for this type of industry. Debt Ratio This ratio indicates what proportion of debt a company has relative to its assets. This will give someone an idea to the leverage a business has along with the potential risks the business faces in terms of its debt-load. The debt ratio is calculated by taking total liabilities divided by total assets. The debt ratio for Competition Bikes was 47.0% in year 7 and 46.2% in year 8. A debt ratio of more than one means that the business has more debt than assets. With a ratio of less than one means the business has more assets than debt. With a ratio of 47.0% and 46.2% is very good for Competition Bikes. This means they have more assets than they do debt. Although the 38.0% that Two Wheel Racing is better than Competition Bikes ratio the ratio is still a positive one. Gross Profit Margin This ratio is a financial metric used to assess a firms financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. This ratio serves as the source for paying additional expenses and future expenses. Gross profit margin is calculated by taking revenue-cost of goods sold. Then you would take that amount divided by revenue ( (Definition of "Gross Profit Margin", 2013). The gross profit margin for Competition Bikes was 27.4% in year 7 and 27.0% in year 8. The gross profit margin of 27.0% was very good for year 8. This proved the company can maintain this ratio even with a decrease in sales. Two Wheel Racing had a gross profit margin of 32.1%. This could many mean things for the tow companys. The one thing could be that Competition Bikes is producing a higher quality bike than Two Wheel Racing.

Operating Profit Margin Operating profit margin use used to measure a companys pricing strategy and operating efficiency. The operating profit margin is calculated by taking operating income divided by net sales. A healthy operating profit margin is required for a company to be able to pay its fixed costs (Definition of "Gross Profit Margin", 2013). The operating profit margin for Competition Bikes in year 7 was 5.3% and 1.9% in year 8. The 5.3% in year 7 is a very favorable amount. The percent of 1.9% in year 8 was very bad. This means that the company lost 3.4% of sales for every dollar in sales in year 8. The operating profit margin for Two Wheel Racing of 5.2% was

favorable. This amount is very favorable compared to Competition Bikes, because Two Wheel Racing had higher operating expenses than Competition Bikes. Net Profit Margin Net profit margin is a ratio of profitability. This ratio is calculated by taking net profits divided by sales. Profit margin ratio will evaluate how much out of every dollar of sales a company truly keeps in earnings. This ratio is very helpful when comparing companies in like industries (Profit Margin, 2013). The net profit margin for Competition Bikes in year 7 was 3.3%. The profit margin for year 7 was acceptable. Even though compared to Two Wheel Racing it was still under their 5.1%. In year 8 for Competition Bikes this ratio was only .6%. This amount was not acceptable at all. This number showed that only .06 cents was earned on every dollar in sales. This happened, because Competition Bikes had a decrease in sales, and they did not have a decrease in their expenses. The company will need to find a way to keep their expenses under control if they want to stay competitive. Earnings per Share

Earnings per share are also a profitability ratio. This ratio will show the portion of a companys profit allocated to each outstanding share of common stock. This ratio is calculated by taking net income divided by each share of outstanding stock. You will not calculate the outstanding shares of treasury stock in the earnings per share ratio. The earnings peer ratio is considered to be one of the most single important ratios in determining a share price (Earnings Per Share (EPS), 2013). The earnings per share for Competition Bikes were .2 in year 7. Two Wheel Racing only had earnings per share amount of .08 for year 7. This shows that Competition Bikes share price was higher than Two Wheel Racing. This was a positive thing for Competition Bikes in year 7. On the other hand, in year 8 Competition Bikes earnings per share decreased to a minimal amount of .03. This was not acceptable at all for the company.

Return on Total Assets This ratio will measure a companys success in using assets to earn profit. This ratio is calculated by (net income + interest expense) divided by average total assets (Horngren, Harrison, & Oliver, 2008). In year 7 Competition Bikes had a rate of assets of 4.6%. This amount compared very well to Two Wheel Racings amount of 4.8%. These two numbers were very comparable to each other, and showed a very rate of assets for both companies. In year 8 it was a totally different story. Competition Bikes rate of assets dropped to .7%. This amount was caused by reduced sales in year 8, and a slight decrease of interest expense.

Return on Common Equity This ratio is a very popular measure of profitability. Return on common equity will show you the relationship between net income and common stockholders equity. This means how much income is earned for each dollar invested by the common shareholders. To calculate this ratio you will subtract preferred dividends from the net income to get net income available to the common stockholders. Then you will divide that amount by average common stockholders equity (Horngren, Harrison, & Oliver, 2008). Competition Bikes had a return on common equity of 8.6% for year 7. Two Wheel Racing had an amount of 8.1%. Competition Bikes had a higher rate of common equity than Two Wheel Racing. This was very positive for Competition Bikes. In year 8 Competition Bikes return on common equity decreased dramatically. This amount decreased to 1.4% in year 8. This was not a positive change for the company. Price/Earnings Ratio Price/Earnings ratio is the ratio of the market price of a share of common stock to the companys earnings per share. This amount will show the market price of $1 of earnings. This ratio is calculated by taking the market price per share of common stock divided by earnings per share. This ratio also appears in the Wall Street Journal stock listings (Horngren, Harrison, & Oliver, 2008). The price/earnings ratio for Competition Bikes in year 7 was 49.67. When comparing this number to Two Wheel Racings price/earnings ratio of 29.00 is not very good. When basing these two numbers by themselves then Two Wheel Racing is by far the most successful company. This is very true when compared to year 8 Competition Bikes. This amount increased to 96.61. This ultimately means the stock investors for Competition Bikes is paying $96.61 for every dollar that is earned. An average company should have a price/earnings ratio of 15-25. This is not very good for Competition Bikes at all.

Times Interest Earned This ratio is a debt ratio. This ratio will tell you nothing about the ability to pay interest expense. This ratio is used to relate income to interest expense. It will measure the number of times operating income can cover interest expense. The ratio is calculated by taking income from operations and then divides it by interest expense. Competition Bikes times interest earned in year 7 was 5.27. This was a very good figure compared to Two Wheel Racings amount of 4.24. Then when you look at year 8 for Competition Bikes this amount decreased tremendously. The times interest earned ratio was 1.77. This shows that Competition Bikes will and can have difficulty paying their interest expense.

Working Capital Working capital is a gauge of both a companys efficiency and its short-term financial health. This ratio generally indicates whether a company has sufficient short term assets to cover its short term debt. Working capital is calculated by taking currents-assets minus current liabilities (Working Capital, 2013). Working capital for Competition Bikes for years 6, 7, and 8 are as follows: Year 6: 1,029,303 105,080 = 924,233
Year 7: 1,353,044 233,700 = 1,119,344 Year 8: 1,575,831 300,200 = 1,275,631

Companies can run into problems if their current assets do not exceed their current liabilities. This does not appear to be an issue for Competition Bikes. The company seems to have an increase in working capital every year. If a company has a decrease in working capital every year then it may indicate a problem. The worst case scenario with decreasing working capital every year is bankruptcy. A decline in working capital could be that the companys sales volumes are declining and, as a result, its accounts receivables number continues to get smaller and smaller. This does not appear to be a problem for Competition Bikes. Their working capital has increased every year from year 6. This could also indicate a problem though. Working capital will also give everyone an idea of how well a companys operational efficiency is. If a company is not operating at its most efficient manner then this will also show up in the working capital. When this happens will cause working capital to increase every year. This seems to be Competition Bikes issue. Even though it looks like they are doing very good with their working capital they are not. This could be due to a number of problems. Money could be tied up in inventory, or money that customers still owe to the company is not being used to pay off any of the companys obligations. Competition Bikes may also not be investing their money properly also. There are a couple of ways the company can improve their working capital:
One way that can be used to increase working capital is to improve your collections.

Looking at Competition Bikes balance sheet does show they have increased their collections. They could take more steps to increase their collections. This could be done to look at their collections process. They can look to see if there are ways to improve this process or not.
A second way to improve your working capital is by focusing on your inventory. You can

improve your working capital by lowering your inventory. When you have excess

inventory lying around you are tying up a great deal of your money. Competition Bikes can look into ways to be more efficient with their inventory. There are a couple of ways this can be done. Hey can look into different Six Sigma types of processes. One Six Sigma process of just in time would be a great process to look in to. This would decrease their inventory that is just sitting around. They would use their inventory as soon as it came in, and you would not have extra inventory.
The company could also increase their available capital. This would include selling

shares of common stock.

Competition Bikes could also try and negotiate better prices from suppliers, and try to

negotiate there terms of net 30, instead of the net 15 that it is now. There are also different ways you can use excess capital to generate profits:
One of the quickest ways to generate profits from excess capital is to advertise. It would

be crucial for Competition Bikes to do advertising at this point in time. There are different ways the company can advertise. One of the best ways for them to advertise would be to look into different magazines that their clientele read. Competition Bikes has decreased their advertising since their sales have dropped. The company needs to find other expenses they can decrease. Advertising is very critical for a company. This s even truer when there is a decrease in sales.
Competition Bikes also needs to invest more money in research and development. It is

realized the company has had a decrease in sales. This in turn causes money to be tight. Research and development is one way the company can improve their product. This can also be used to find ways to decrease the cost of their product. The company needs to find other expenses to cut.
One of the last ways to increase profits with excess working capital is to invest in the

manufacturing facility. This could be done in investing in more modern equipment to help lower the cost of the labor involved. This could be done either mechanically or computerized automation. Competition Bikes has not used any capital to help with the manufacturing process. This could help the company decrease their labor time in processing an item. Internal Controls Internal controls are the organizational plan and all the related measures to: Safeguard Assets
Encourage employees to follow company policy.

 Promote operational efficiency. Ensure accurate, reliable accounting records.

Internal controls are very important for a company. Companies need to find a process and plan that will work best for their company (Horngren, Harrison, & Oliver, 2008). By taking a quick look at the purchasing system it seems to separate all the different departments to insure all the right policys are followed. I would recommend the following changes in the process. The purchasing department will issue a purchase order to the supplier based on the monthly budget projections. It is not listed where the budgeting projections came from. This needs to be identified, so everyone knows who is in charge of the projections. It should also be listed in the process exactly what suppliers the order will be forwarded to. You do not want to leave it up to the purchasing department. Purchasing checks with thee sources for similar quality materials and selects the low bidder from the three. There needs to be a check in place to verify that three bids were accepted, and the lowest one was taken. Without this check there is no way to tell if the lowest bidder got the order. There also needs to be an explanation of the bidding process. Does the purchasing department just pick three suppliers? Is there a list? This needs to be further explained. The purchase order is sent to the supplier by the purchasing department on the first of the projected month. There needs to be verification the lowest bid was accepted. The purchase order also needs to be verified by someone. This is to make sure the right amount was ordered. Upon receipt of the goods they will be brought to the production line for use during the month. This does not explain how they were received. Did someone verify the amounts? Someone needs to check the order for accuracy. The items received needs to be checked against the items that were ordered. This way you know you are getting what you are paying for. Any unused parts are sent to the raw materials inventory stores on the last day of the month. There needs to be a check against the inventory that was used, and the inventory that is being sent to the inventory stores. This should be done to make sure no inventory is getting lost or stolen. The company also needs to look into why there is extra inventory being ordered. You want to try to order just enough inventories for the month. Is should also be explained where the inventory stores are, also what they are.

Purchasing sends the suppliers invoice to accounting and accounting writes a check to pay the invoice. The accounting department needs to have a check done to verify the checks are being sent out, and that the checks were sent out for the right amount. Corrective Actions

Competition Bikes needs to have a process that includes inventory control and verification of every step to make sure their plan is used to its fullest. I will list the steps that should be taken to make sure this happens.
1) There should be requirements to come up with how many supplies are needed to be

ordered. The inventory should be compared to the planned production, and what is on hand from the previous month. The request should be created after this is done. The production manager should approve this order then send it purchasing.
2) There should be a list of suppliers that are too be used by the purchasing department. The

purchasing department should then submit the purchase order to these suppliers. A different employee should then take those bids, and review them. The purchasing manager should also review the bids, and pick the best one.
3) The purchasing manager should then submit the purchase order to the chosen vendor at

the first of the month.

4) When the supplies are received they should be checked against the purchasing order.

While this is being done the inventory should be entered into the inventory system. If there are any issues there should be taken care of at this time.
5) As supplies are being used in production they should be entered into the inventory

system.
6) At the end of the month the inventory that is left over should be compared to the

inventory system to make sure everything is accurate.

7) The supplies then need to be documented as left over, so then they can be accounted for

when ordering supplies for the next month.

8) The accounting department should be sure all the appropriate steps were followed. They

should also make sure that all required documents are accounted for. Payment should then be prepared. The accounting manager should verify the payment was made, and the appropriate amount was paid.

Risks to Internal Controls Competition Bikes have many risks with their current process. These risks at each level of the plan they have in place. We will look at each department separately.
Supply Attainment: With the way the plan is set up there is no over sight on the supply

acquisition process. There is no set process on how to come amount the number of supplies that need to be ordered. There is also not a process set up to when the supplies should be ordered. There needs to be a process setup, because if not it could lead to over buying supplies, or even buying to many supplies. There is also no way to account for all the supplies. The supplies that are received, used, or even left over at the end of the month.
Supply Handling:

There is no process to make sure all the supplies ordered were received. There also needs to be some kind of a quality check. This way there is confirmation that the right amount of supplies was ordered, plus the quality the company needed. There is no accountability as to what supplies are being used, and to when they are being used. There is no accountability in the accounting department. Once the accounting department gets the invoice there is no way of seeing if the invoice was paid, or how much was paid. The accounting department needs to make sure all the appropriate were followed also before the invoice is paid. Someone needs to verify the invoice was sent out, and the appropriate was paid. This will help with misallocation of funds.

Accounting:

There are a variety of risks that each of these departments is taking on. These risks include poor control setup, lack of management review, and inflexible internal controls. The whole process of the purchasing should be re-vamped. There is a lot of room for the possibility of corruption, waste, and abuse. Risk Mitigation
The discussion on an Enterprise Risk Management System is great. However, more specific discussion is needed on how Competitive Bike's can mitigate risks arising from internal control weaknesses.

The best way for Competition Bikes to mitigate their risk is to develop an Enterprise Risk Management System. An ERM includes the methods and processes used by companies to control risks and take hold of opportunities associated to the achievement of the objectives. An Enterprise Risk Management consists of eight major components. These components are:
Internal Environment

 Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information and Communication Monitoring

(Enterprise Risk Management: Strategy, Structure, and Process, 2013) Competition Bikes will have a step by step process that is defined to accomplish their needs with this system. Each step will be well defined, and there will be checks and balances to make sure they are all followed. With this system all the possible risks and failures will be identified, and all the procedures will be put into place to make sure all the controls are followed. The whole company needs to start using the process. The process cannot be done just by upper management. All the steps mentioned above will have to be taken by the company. All employees need to make sure they are trained properly, and understand the whole process to make it a success. With this process in place it will require each step of the company procedures for operations will be defined. This means that each invoice that is submitted will be checked for accuracy. Each shipment that is shipped in will be checked, and every check that is written will be checked. All these will also be verified by a separate employee to make sure the appropriate steps were followed. Once each step of the process is defined there will be a check and balance system put into place to make sure everything is correct. This will include checking each shipment against the invoice, and putting this information into a inventory system. This system will be updated every time there is inventory removed. This will then be checked at the end of each month to verify accuracy. The process will also identify possible points that could be at risk for failure. This could vary from not enough inventory being ordered to much be ordered. This could also include the shipment we received did not receive the entire inventory we ordered. Also a check could be written for inventory not ordered, or the amount could be wrong. Having everything checked at each step will help mitigate the risk. It will help to make sure all inventory is received, and checks are wrote for the appropriate amount.

Once every step of the process is identified, the possible risks identified, and then the procedures can be put into place to control all of the possible risks. Once all of these steps are complete the process needs to be over looked by someone. There needs to be internal and external audits done to make sure these steps are being followed. These audits should also be done to make sure these steps are properly mitigating the risks that were identified. Sarbanes-Oxley Compliance
The response provides discussion on what Sarbanes-Oxley is and how it came about. There is some discussion on general problems Competition Bike's may have with compliance issues. However, a plausible analysis, with specific discussion on Sarbanes-Oxley requirements is not evident. Please resubmit with more detailed discussion on Sarbanes-Oxley and whether Competition Bike's is compliant or not with aspects of Sarbanes-Oxley.

The Sarbanes-Oxley Act was passed by congress in 2002. This act was passed to protect investors from the possibility of fraudulent accounting activities by corporations. SOX mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud (Sarbanes-Oxley Act of 2001 - SOX, 2013). This act consisted of 11 sections total. Competition Bikes annual report states that they used the criteria set forth by COSO for their internal controls. By looking at their description the company is doing very little of what is required by them. Competition Bikes does not have a functioning plan in process. They have no one that is in charge of overseeing the purchasing or accounting processes. The company has not stated if their audits that are in place. Competition Bikes also has not shown any of the required financial controls, and most importantly there was nothing stated about the security of their financial records. There are certain items concerning internal controls that management is responsible for. I dont believe all of these items are being met. The items that are not being met that should be are:
Competition Bikes have a process for ordering and receiving component parts. In the

statement there is nothing in there about how management is responsible for establishing and maintaining adequate internal control.
Competition Bikes does not identify the framework which is used by management to

evaluate the effectiveness of their internal controls.

The company cannot provide with reasonable assurance that their transactions are

recorded within the generally accepted accounting principals.

The company cannot also provide with reasonable assurance the prevention or timely

detection of misstatements on their financial statements.

Corrective Actions
The suggestion of implementing a six phase approach to assess compliance is plausible. However, once A4 is revised, more specific recommendations of corrective actions for non-compliant areas can be provided.

There is a six phase process that can be implemented to correct all the compliance issues Competition Bikes has with SOX act. This approach will help you perform an evaluation and assessment of the internal controls, so you are in line with the SEC guidelines. The six phases are as follows:
1) Organize and Launch: This will represent the most important step. If this phase is not

done correctly you will lack the solid foundation that the company needs for the next stages. In this stage you want to meet with the senior management team, the audit committee, and the board. Next you will want to identify your lead and supporting resources. Next you want to determine the role of your internal audit, determine which internal framework you will use, and then create your documentation.
2) Identify Financial Reporting Risks: This where you want to identify any significant

financial reporting elements, determine what could go wrong, rank your risks, and identify the different components and systems that will be used.
3) Identify Controls That Adequately Address Financial Reporting Risks: In this phase you

will want to identify entity-level controls, identify lower level controls, and identify IT general controls,
4) Evaluate Evidence of the Operating Effectiveness of Internal Control over Financial

Reporting: During this phase you will consider control risk factors, evaluate control effectiveness, and document your findings.
5) Conclude and Report:

In this part of the process you will weigh magnitude and likelihood, classify deficiencies, report your findings, remediate control deficiencies, and report on control effectiveness. financial reporting risks, integrate the processes necessary to comply with SOX, configure your computer applications to expand the number of automated controls you can rely on, upgrade documentation tools, consolidate your activities around other regulatory requirements, enhance the process for communicating control deficiencies to management, and increase internal control training for business process owners and other employees.

6) Sustain & Improve: In the last stage you want leverage entity level controls to mitigate

(Applying a Top-Down, Risk-Based Approach, 2013) Competition Bikes needs to overhaul their purchasing, inventory control, and financial process. This should be immediately before the company can certify that they met the SOX requirements. The company states they use the COSO framework for their internal controls. This system would be a very good start for the company. They need to review this system and apply it effectively to their company. Competition Bikes needs to start by developing a plan that has each business process involved. This plan must be documented and verified by all employees. There should be a check and balances at each step of the process. To make sure each step is followed there should also be documentation at every step. This will help ensure that all the steps are followed, and followed appropriately. Not only should there be human checks made there should also be self checked steps in the system itself. This can be done by self-checking the inventory levels within the system to make sure they match. When the check is entered in the computer it could self-check itself to the specific invoice. This system should include all aspects of the Competition Bikes operation. The system should also provide accurate and verified data that management can endorse, and that auditors will approve of.

Works Cited
Applying a Top-Down, Risk-Based Approach . (2013). Retrieved May 30, 2013, from Delotite: http://www.deloitte.com/assets/Dcom-UnitedStates/Local %20Assets/Documents/us_sarbanes_NAF%20013108.pdf Definition of "Gross Profit Margin". (2013). Retrieved May 28, 2013, from Investopedia: http://www.investopedia.com/terms/g/gross_profit_margin.asp Definition of "Operating Margin". (2013). Retrieved May 23, 2013, from Investopedia: http://www.investopedia.com/terms/o/operatingmargin.asp Earnings Per Share (EPS). (2013). Retrieved May 30, 2013, from Investopedia: http://www.investopedia.com/terms/e/eps.asp Enterprise Risk Management: Strategy, Structure, and Process . (2013). Retrieved May 30, 2013, from MJF Cerified Public Accountants & Management Consultants: http://mjfllp.com/index.php?option=com_content&view=article&id=72&Itemid=73 Horngren, C., Harrison, W., & Oliver, S. (2008). Accounting 8e. Prentice Hall. Profit Margin. (2013). Retrieved May 30, 2013, from Investopedia: http://www.investopedia.com/terms/p/profitmargin.asp Sarbanes-Oxley Act of 2001 - SOX. (2013). Retrieved May 30, 2013, from Investopedia: http://www.investopedia.com/terms/s/sarbanesoxleyact.asp Working Capital. (2013). Retrieved May 30, 2013, from Investopedia: http://www.investopedia.com/terms/w/workingcapital.asp