An income statement is a type of a financial statement for a company which accounts for the revenues and expenses of a firm and shows how revenues are transformed into a net income. Income statements are useful in the provision and indications of financial earning performance over a specific period of time such as a year or quarter. They can also be used on a comparative basis with other years (Fraser, Ormiston, & Fraser, 2010).
Fraser, Ormiston, and Fraser (2010) add that a balance sheet is a type of financial statement that a company uses to indicate its assets, liabilities and shareholder equity in at any time. The purpose of a balance sheet is to indicate a businesss net worth and indicate the financial worth of a business.
The two financial statements are related to the fact that the income statement reports a business's fiscal performance whereas the balance sheet shares its fiscal health. A business's fiscal performance determines its financial health. Hence, when a company's financial performance declines, its financial health worsens.
Krispy Kremes financial status does not exact. The assertion is guided by the fact that over the years, the company recorded $174.5 million as intangible assets which were ideally reacquired franchise rights even though the company was not required to amortize them. In addition, its financial statements were to be restated to correct errors (Bruner, Eades, and Schill, 2014).
A companys management does not have discretion over how the financial statements are created. Instead, the company's management is required to use a set of generally accepted accounting principles. Generally accepted accounting principles which are popularly abbreviated as GAAP is a set of approved rules which include complexities and legalities in corporate accounting.
Analysis of Parts of the Financial Statement
Krispy and Kreme has a high and consistently increasing cash, and cash equivalent value which indicates a healthy financial position since the company has liquid resources at its disposal. Since the company has a high value in accounts receivables and, plant, property, equipment, and inventories, it may create a problem in its cash flows since it has not been paid for products delivered thus making the business unhealthy. Also, it is expensive to store and insure inventory, and the high value of inventory may indicate that it has become obsolete. In addition, the companys expenses do not exceed the revenues thus indicating that it is of good financial health. Also, the fact that the value of goodwill and other intangibles is high and has been growing over the years shows that it is financially healthy since the company is receiving more value for its purchases.
Historical Growth of Krispy Kreme
Is Krispy Kreme Financially Healthy?
An example of an indication of the good financial health of the company is the fact that at a point in time did the company's liabilities exceed its assets. Another indication of the companys good financial health is the fact that the Krispy Kreme had positive shareholder equity. By having positive values as its shareholder equity, has enough assets to cover its liabilities.
The company's financial ratios show that it has been financially health until 2004. Financial health is often indicated when the ratio is close to 1.0, but in 2004, its current ratio and quick ratio were at 3.25 and 2.72 respectively meaning that it had capital but was being underutilized. The companys profitability ratios indicate that it is in good health since all the ratios including return on assets, return on sales, net margin and net profit margins have positive values.
Why did its Stock Price Drop?
One of the reasons to why the companys stock price dropped by 80% between 2003 and 2004 was its decision to delay the filling of its 2004 financial reports which placed it a risk of being delisted from the New York Stock Exchange. Another reason was that the company informed investors that its earnings would be 10% lower than anticipated and attributing the situation to low carbohydrate diet trends in the US which negatively impacted its sales. In addition, the company reported that some of its coffee and doughnut joints were not performing as expected thus it had to close some of them. Lastly, the company engaged in the aggressive treatment of accounting approaches when making franchise acquisitions. The approach it took was deemed controversial as it failed to conform to the generally accepted accounting principles thus necessitating an informal investigation (Bruner, Eades, and Schill, 2014).
Bruner, R., Eades, K., & Schill, M. (2014). Cases studies in finance.
Fraser, L. M., Ormiston, A., & Fraser, L. M. (2010). Understanding financial statements. Pearson.
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