ACC644 Financial Statement Analysis
Comprehensive Project
OBJECTIVE
Financial Statement Analysis project involves a team of students analyzing financial statements of two (2) companies ( FIRST COMPANY: GAP INC. – SECOND COMPANY: AMERICAN EAGLES) prepare a written analysis as well as recommendations.
ADDITIONAL RESOURCES
In addition to these guidelines, additional information is provided on the companys Web site, library databases and the textbook including: formulas and guidelines for calculations, information about the two (2) companies being analyzed, and any special considerations related to the specific companies or current economic conditions.
DESCRIPTION
The team will be analyzing each companys annual report (10-K filing), which serves as a résumé of a corporation. The Generally Accepted Accounting Principles (GAAP) and by the Securities and Exchange Commission (SEC) provide much of the information in corporate annual reports and in the 10-K. Specifically, GAAP requires annual reports to disclose four financial statements: a Balance Sheet, a Statement of Cash Flows, an Income Statement and a Statement of Retained Earnings.
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FINANCIAL STATEMENT ANALYSIS PROJECT
FALL 2012
FORMAT FOR PROJECT:
TITLE PAGE
The first page of the project is the title page, which lists the following:
FINANCIAL STATEMENT ANALYSIS PROJECT
Analysts (Participants) Names
Date
The body of the project must consist of the following six (6) sections – clearly marked.
SECTION 1: EXECUTIVE SUMMARY
In this section provide a brief overview of each of the two corporations. Participants are not limited but, at a minimum, should provide the following information for both companies:
Official name of the corporation
Location of the corporate headquarters
The state in which the company is incorporated
Company Internet address
Stock symbol of the corporation and the exchange on which it is traded
Fiscal year-end of the corporation
Date of the 10-K filing according to the financial statements provided
The companys independent accountant/auditor
The primary products(s) and/or services (s) of the corporation
SECTION 2: BALANCE SHEET ANALYSIS
1. Using elements listed on your companys balance sheet, prepare a common size balance sheet using the following format. (Vertical Analysis Chapter 5)
COMPANY #1
Account
Current Year
%
Prior Year
%
COMPANY #2
Account
Current Year
%
Prior Year
%
2. Using elements listed on your companys balance sheet calculate the increase or decrease in dollars and percent between the years using the following format. (Year to Year Change Analysis Chapter 5)
COMPANY #1
Account
Current Year
Prior Year
+/- $
%
COMPANY #2
Account
Current Year
Prior Year
+/- $
%
3. Using elements listed on your companys balance sheet calculate the ratios and amounts using two years prior as the base year (100%) using the following format. Your answers should all be in percentages (Horizontal Analysis Chapter 5).
COMPANY #1
Account
Current Year/Base
Prior Year/Base
COMPANY #2
Account
Current Year/Base
Prior Year/Base
4. In thoughtful, well-organized paragraphs comment on changes you see in the balance sheet with regards to each company over the two-year period.
Among the items to consider:
a. Comment on any significant changes in each company in assets and liabilities.
b. Comment on any significant changes in each company in the composition of current assets and current liabilities.
c. Which assets in each company have the most significant investment?
d. Are the companies financed primarily with debt or equity?
e. Is the debt primarily short-term or long-term?
f. Compare the balance sheets of both companies with regards to size and composition of assets, liabilities, and stockholders equity.
SECTION 3: INCOME STATEMENT
1. Using elements listed on your companies income statement, prepare a common size income statement using the following format. (Vertical Analysis Chapter 5)
Company #1
Account
Current Year
%
Prior Year
%
Two Years Ago
%
Company #2
Account
Current Year
%
Prior Year
%
Two Years Ago
%
2. Using elements listed on your companies income statement calculate the increase or decrease in dollars and percent between the years using the following format. (Year to Year Change Analysis Chapter 5)
Company #1
Account
Current Year
Prior Year
+/- $
%
Two Years Ago
+/- $
%
Company #2
Account
Current Year
Prior Year
+/- $
%
Two Years Ago
+/- $
%
3. Using elements listed on your companys income statement calculate the ratios and amounts using two years prior as the base year (100%) using the following format. Your answers should all be in percentages. (Horizontal Analysis Chapter 5)
Company #1
Account
Current Year/Base
Prior Year/Base
Two years ago/ Base
Company #2
Account
Current Year/Base
Prior Year/Base
Two years ago/ Base
4. In thoughtful, well-organized paragraphs comment on changes you see in the income statements for each company over the three-year period.
Among the items to consider:
a. What is the trend, in each company, in total revenues over the three years?
b. What is the trend, in each company, in gross profit over the three years?
c. What is the trend, in each company, in net income over the three years?
d. What is the trend in profit margin over the three years?
e. Comment on any significant changes in revenues or expenses, negative and positive changes for each company.
f. Comment on any significant changes in the discontinued operations, extraordinary items, or changes in accounting policy for each company.
SECTION 4: RATIO ANALYSIS
Compute the ratios for the most current year in following categories.The calculations used to determine the answers for the ratio analysis must be included in the appendix.
Liquidity Ratios
Company #1
Company #2
Current Ratio
Acid (Quick) Ratio
Working Capital
Cash Ratio
Days Sales in Receivables
Accounts Receivable Turnover
Accounts Receivable Turnover in Days
Days Sales in Inventory
Inventory Turnover
Inventory Turnover in Days
Operating Cycle
Sales to Working Capital
Operating Cash Flow to Current Maturities of Long-term Debt and Current Notes Payable
Long-Term Debt Paying Ability
Company #1
Company #2
Times Interest Earned
Fixed Charge Coverage Ratio
Debt Ratio
Debt / Equity Ratio
Debt to Tangible Net Worth Ratio
Operating Cash Flow / Total Debt
Profitability Ratios
Company #1
Company #2
Net Profit Margin
Total Asset turnover
Return on Assets
Sales to Fixed Assets
Return on Investment
Return on Total Equity
Return on Common Equity
Gross Profit Margin
Investor Ratios
Company #1
Company #2
Degree of Financial Leverage
EPS – Basic
EPS – Diluted
Price / Earnings Ratio
Percentage of Earnings Retained
Dividend Payout
Dividend Yield
Book Value
Operating Cash Flow / Cash Dividends
For each group of ratios, comment on:
As a category, what is being measured?
What does it mean?
What is the relative position of each of the corporations?
Who are the users of this information?
Which company is in the best overall position?
SECTION 5: CONCLUSIONS/RECOMMENDATIONS
Draw conclusions from the data that was gathered in the previous sections and determine the relevant position of each of the corporations in all of the analyses. The conclusions/recommendations must address the following as a comparison between
the two companies. The thoughtfulness of the analysis will be the most important factor in the evaluation of this section.
1. What are the overall strengths and weaknesses of each corporation?
2. What recommendation would you make to current and potential private or organizational investors in the two corporations?
3. What recommendation would you make to lenders regarding the credit-worthiness of the corporations?
4. Position, salary and benefits being equal, which company would you prefer to work for?
SECTION 6: PUBLIC PERCEPTION AND RECENT RESULTS
Regardless of the on paper financial strength of a company, decisions are often made based on the public perception of a company. A rumor within the financial industry may make it difficult for a company to obtain a loan. Negative publicity may force other companies and private citizens to stop doing business with a company. Even a company who performed well, but missed analyst projections, may see a drop in public confidence and a reduction in stock value. Yahoo finance is a great source for research. Based on current research, answer the following questions:
1. What is the general sentiment toward each company?
2. How does the financial industry currently perceive each company?
BASED ON THE FINDINGS:
3. How has public perception positively or negatively affected the companies?
4. What, if anything, has the company done to counter any negative sentiment that may exist?
5. How, if at all, has the company capitalized on any positive perceptions that may exist?
Finally, obtain the most recent financial reports filed with the SEC by each of the two companies and evaluate recent performance. Answer the following questions:
6. Since the 10-K filing analyzed in the previous Sections, how have each of the two companies generally performed?
7. Were there any noteworthy disclosures in the most recent filings?
BASED ON FINDINGS
8. How has each of the companies stock performed over the last 24 months?
9. Would you say the company has positive or negative momentum moving in to the close of its next fiscal year?
10. Would you change any of your conclusions or recommendations from the previous section based on current financial information?
ACC 644 Financial Accounting
Financial Statement Analysis Project
Progress Report
Our Two Companies: _____________________________________________________
Group Leader: _____________________________________________________
Briefly discuss below the progress that has been made on this project so far.
§ What sections are completed?
§ What sections are group members still working on?
§ Have you been in touch with all the group members?
§ Are they submitting work on-time?
§ Do the group members have all the materials they need to complete their work?