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During your review of financial statements of company x you found the following major facts:
1-company's gross profit remained same as last year i.e.10 million
2-Despite inflationary pressure worldwide, company managed reduction in cost by using cheaper materials
3-Gross Sales figure remained the same vs last year
4- Net sales (sales-sales return) dropped by5% vs. last year
As net sales is dropped we can say company performing well temporarily. Again material is procured at a cheaper rate. If quality material is bought at a cheaper rate than things are fine. But alarm is on if low quality material is used at a cheaper rate.
There is a threat to this company X as the grossprofit was stagnant and they have started using ceaper raw materiasl which shall affect the quality of their products and start loosing customers as reflected already in the5% decrease in Net sales
I think Company is performing well for the below reasons;
1. Company X has a political situation in the country in which its operating. This is one of the factors that makes a company to perform in ascending manner.
2. Due to inflation, making just the same amount of money is very skeptical for reasons being that the cost index for one product should increase and as well the sales value. Thus, if the sales dropped by 5%, then the customers were not pleased with what the company produced upon management of the politacl crisis.
3. Thirdly, the sales value could increase in the coumtry in which it operates its activities but if converted to another currency, it shows to be lower than the previous year performance. That is, the forward rate agreements.
