Prepare a report on your company using the competitor for comparison and contrast.
The focus of the report is to determine the extent to which you are comfortable relying on the financial statements as presented by management. In your report, discuss trends, financial position, ratios, etc. only if relevant for evaluating the quality of reported financial information or specifically required by the project. For example, it may be helpful to discuss inventory turnover when assessing inventory valuation risk.
To assess a company's financial statements, think specifically about:
(1) the types of underlying transactions and events that affect the company,
(2) how well the financial accounting rules (i.e., GAAP) reflect those transactions and events,
(3) the aggressiveness or conservatism of management's accounting choices, and
(4) how the annual report helps you assess the company's risks, financial position, and profitability.
Because the course focuses on accounting aspects, there are instances where this assignment calls for greater elaboration than needed in a business setting.
1. REVENUE RECOGNITION AND RECEIVABLES VALUATION:
- Types of revenue transactions (e.g., cash, credit, or advance customer orders, etc.)
- Importance and role of accounts receivable to the company
- Potential for abuse of accounts receivable
2. COST OF GOODS SOLD AND INVENTORY VALUATION:
- Importance and role of inventory for this company
- The inventory valuation method(s)
- Major inventory valuation risks for this industry (e.g., obsolescence, declining demand, fluctuating costs, technological change, or other)
- Potential for abuse of inventory in financial reporting (explain how if it is likely)
3. PROPERTY, PLANT, AND EQUIPMENT:
- Importance and role of PP&E to the company
- Major acquisitions, disposals or write-downs (PP&E additions are often referred to as "capital acquisitions" in the statement of cash flows.)
- Depreciation method used for financial reporting
- Compute and compare the approximate average age and remaining life of the company's aggregate depreciable assets in years (show calculations in an appendix)
4. INTANGIBLE ASSETS:
- Importance and role of intangibles to the company
- Major types and reasonableness of intangible assets reported on the balance sheet
- Identify any intangible assets that are likely not included on the financial statements, explain why they are not included, and discuss their likely impact
5. LONG-TERM DEBT, CONTINGENCIES AND LEASES:
- Description of major long-term debt (if any)
- Major leasing activities (if any) and types of leases involved
- Business reasons for, and importance of leasing activities
- Other significant liabilities disclosed for contingencies, warranties or commitments and their importance
6. POST EMPLOYMENT BENEFITS AND DEFERRED TAXES:
- Type(s) of retirement plans offered and the funding status of each plan
- Other post-employment benefits offered
- Role of deferred taxes to the company
7. CASH FLOWS:
- If the company or the competitor uses the indirect method, convert the major operating items of both companies to the direct method and compare them. Note: You probably will not arrive at the same operating cash flow as shown in a statement that uses the indirect method.
- Non-cash investing and financing activities, if disclosed
8. ADJUSTED FINANCIAL ANALYSIS: Using information and techniques discussed in the course develop graphs and evaluate each of the items below (for both companies) after making appropriate adjustments (Warren Buffett style). You must compute the present value of any operating leases and other major off-balance sheet obligations. You may show your calculations in the appendix. For each question, select a ratio or other quantitative measure as discussed and adjusted in the course; avoid multiple measures, unless required. No data tables allowed! Do the calculations, and then draw conclusions. Graphs are required!
- How profitable is the company?
- How well does it generate revenue with its resources?
- How effective is it in collecting its receivables?
- How promptly does it pay its own short-term debt (payables)?
- How well does it manage its inventory?
- How heavily leveraged is it?
- How well does it provide a return to its owners in real dollar terms?
9. EVALUATION: What is your evaluation of the company based on your work above? At a minimum, include:
- The extent to which the financial report contributes to (or fails to contribute to) your ability to assess the financial position, earning power, and liquidity
- The helpfulness of the footnotes (the ease or difficulty for users to find and understand the relevant information). Are there additional disclosures that would have been useful to users of the financial statements?
- Comparison of the company's reporting to the competitor's in these respects
- Provide and justify your opinion of the financial performance and outlook for the company as compared to the benchmark.
10. GRADUATE ANALYSES (ACTG 4222 only) Discuss and evaluate the following:
- The explanation and reasonableness of the three most significant MD&A disclosures
- The risk that the value of the Company's PP&E is significantly misstated on its balance sheet
- The risk that the Company's contingent liabilities are significantly misstated
- Explain and assess any legal actions pending against the company (describe the likely outcome and financial effect)
- The company's financial risk with its post-employment benefits
- The effective tax rate as compared to the statutory and cash tax rates.