Income and Accrual Bases Analysis Essay Example
You will definitely need to write analytical essays regardless of what you actually study – literature or economics. Below you'll find an example essay on income and accrual bases of a giant computer company Dell. Though it refers to finance, it could also be used as a structure template for business management or marketing-related topics. So feel free to exploit the best practices showcased here to craft your own analysis essay!
Dell Trend and Red Flag Analysis
An in-depth evaluation of Dell's Current Ratio reveals a significant decline in 2006 compared to the previous financial year ending 2005. This decline subsequently prompts a further assessment of the two-line items that constitute this ratio, which are the Current Assets and the Current Liabilities of the company.
Current assets primarily comprise the company's receivables, inventories, cash, and other existing assets, all of which increased during the review period. However, further analysis of cash as a stand-alone item reveals that it comprised $4,839 in cash from operating activities; $3,878 in cash from investing; and $6,225 in cash from financing activities.
In this regard, the biggest concern is the cash from operating activities, which is almost similar to the cash obtained from investing. Generally, a company's primary cash source should be its operating activities, which preferably must be more than 50% of the total generated cash. This is not the case regarding Dell and may further point to the poor overall business performance in terms of its core activities.
On the other hand, the company's current liabilities comprise of its accrued expenses and its account payables. Both of these items increased as the current assets also grew. The increase in accounts payable is not necessarily an alarming occurrence, as it may indicate that Dell re-negotiated payment terms with suppliers resulting in an extended payment period. Such a situation will significantly improve the company's liquidity in the short term.
However, the biggest concern here is the increase in the company's accrued expenses, which indicates that the company is not honoring its short-term obligations. This situation, if left unchecked, will significantly strain the company's liquidity position in the long run.
Red Flag Analysis
Dell's cash flow from investing has predominantly been used to buy back the company's stock. However, the analysis above reveals that the company's cash flow from operations was low compared to the industry best practice of at least 50% of the total cash flow. In this regard, buying back the company's shares will result in a corresponding increase in their value, which will make the company look good to external investors, yet its core business is not performing equally as well. This is a big red flag for auditors, investors, and other stakeholders of the company.
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