ACC644 Financial Statement Analysis Comprehensive Project

OBJECTIVE Financial Statement Analysis project involves a team of students analyzing financial statements of two (2) companies from the same industry and 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 rsum 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.

FINANCIAL STATEMENT ANALYSIS PROJECT Summer 2013 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

ANF GPS

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 GAP INC 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 1.89 1.01 1788 0.6 ANF 1.98 1.27 617 0.931

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

4.9 times

1. As a category, what is being measured? 2. What does it mean? 3. What is the relative position of each of the corporations? 4. Who are the users of this information? 5. Which company is in the best overall position?

6. An entity's ability to maintain its short-term debt-paying ability is important to all users of financial statements. If an entity cannot maintain a short-term debtpaying ability, it will not be able to maintain a long-term debt-paying ability, nor will it be able to satisfy its stockholders" (Gibson, p.253). It is safe to assume that current liabilities will be paid with cash generated by current assets. A profitable company still may have difficulty paying its short-term debt. Many companies use accrual accounting and are able to report high profits but are unable to meet its current obligations. The liquidity ratios look at aspects of the company's assets and their relationship to current liabilities. An example of Liquidity ratios is as follows: 7. (1) Current Ratio: This ratio measures the firm's ability to meet its current debt. A simple calculation of Current Assets, divided by Current Liabilities will enable the user to compare this ratio to that of the industry or other competitors. Historically, the guideline for the current ratio has been approximately 2.00, but in more recent times the current ratio has risen. This is an indication that the liquidity of firms has declined.

Long-Term Debt Paying Ability GAP INC Times Interest Earned ANF

Fixed Charge Coverage Ratio Debt Ratio Debt / Equity Ratio Debt to Tangible Net Worth Ratio Operating Cash Flow / Total Debt

.612 39.36%

.391 8.63%

1.82b/1.25b

Profitability Ratios GAP 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 29.33 40.87% 35.05% 42.56% 63.17% 13.01% 14.14% 7.83% 2.1 times 16.8% ANF 1.2% 1.53 times 8.48%

Profitability ratios are designed to evaluate the firm's ability to generate earnings. According to Gibson (1997), "Analysis of profit is of vital concern to stockholders since they derive revenue in the form of dividends. Further, increased profits can cause a rise in market price, leading to capital gains. Profits are also important to creditors because profits are one source of funds for debt coverage. Management uses profit as a performance measure." (p. 385). There are several ratios that may be used to measure profitability and the income statement contains several figures that may be used for profitability analysis. An example of Profitability measures is as follows: (1) Net Profit Margin: This ratio gives a measure of net income dollars generated by each dollar of sales. Computed, it is Net Income before Minority Share of Earnings and Nonrecurring Items, divided by Net Sales. The higher the ratio the better as higher profits generated by any means is positive. (2) Return on Assets: This ratio measures the firm's ability to utilize its
5

assets to create profits by comparing profits with the assets that generate profits. This formula is Net Income before Minority Share of Earnings and Nonrecurring Items, divided by average total assets. The most accurate average should be taken from month-end figures, however this information is not available to the outside user. Using the beginning and ending figures will provide an adequate approximation by will not reflect the changes being felt during the month (Gibson, p. 389)

Investor Ratios GPS 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: 8. As a category, what is being measured? 9. What does it mean? 10. 11. What is the relative position of each of the corporations? Who are the users of this information? 7.39 2.71 15 14.6% ANF

12. 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 creditworthiness 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?