Financial Accounting Project (PAYPAL & SQUARE)

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FINACC_ProjectWorkbook_.xlsx
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Overview

Financial Accounting - Project
Project Workbook
Instructions:
1. Make a copy of this document before editing it. (File > Make a copy)
2. Save the document locally on your computer
3. Name the file "FINACC/Project Workbook/*Name
4. When prompted to work on your project, navigate to this document
5. Access the relevant step by clicking the link below, or through the tabs at the bottom
6. Once you complete a part of your project, be sure to mark it as complete on this page.
7. Save the document regularly - especially after working on it.
8. Ensure that you have completed the relevant project steps before uploading the document to Canvas. Remember that you will use this document throughout the course, and will complete it in stages.
An important part of learning is application. To learn accounting, we must practice the skills taught and apply those skills to real-world problems. To that end, we have designed a project to reinforce the lessons in each module and apply them to real companies. The goal of this project is to complete a comprehensive analysis of two (or more) companies in the same industry. We will then create a set of forecasted financial statements and a valuation of the companies’ equity. This is essentially what financial analysts and many creditors do. We might not aspire to be an analyst or creditor, but by completing a project of this magnitude, we will have mastered financial reporting at a sufficient level to be able to step into any role in an organization.
Two publicly traded companies that compete with each other. (Paypal & Square) They must be publicly traded, as private company financial statements will not be publicly available. While the two companies do not need to be head-to-head competitors, their main lines of business should broadly overlap. At this stage, choose companies that are profitable (net income is positive) and that have positive retained earnings and stockholders’ equity. Select companies whose financial statements are not overly complicated. (Probably avoid the automotive, banking, insurance, and financial services industries. Automotive companies have large financial services subsidiaries that act like banks for customers, which complicates the analysis. Banking, insurance, and financial services have operations that differ drastically from the usual industrial companies common in practice. While these companies can be analyzed, they present challenges for the beginning analyst.)
88, 8.
Tasks Complete
SWOT Analysis (M1)
Download Reports Filed with the SEC (M1)
Access and Download Additional Information Sources (M2)
The Balance Sheet and The Income Statement (M3)
The Statement of Stockholders' Equity and The Statement of Cash Flows (M3)
Analyzing and Interpreting Financial Statements (M5)
Revenues, Receivables and Operating Expenses (M6)
Inventories, Accounts Receivable and Long-Term Assets (M7)
Current and Long-Term Liabilites (M8)
Stock Transactions, Dividends & EPS (M9)
Intercorporate Investments (M10)
Leases, Pensions and Income Taxes (M11)
Cash Flows and Valuation (M12)
S+D33elect two publicly traded companies that compete with each other. (Paypal & Square) They must be publicly traded, as private company financial statements will not be publicly available. While the two companies do not need to be head-to-head competitors, their main lines of business should broadly overlap. At this stage, choose companies that are profitable (net income is positive) and that have positive retained earnings and stockholders’ equity. Select companies whose financial statements are not overly complicated. (Probably avoid the automotive, banking, insurance, and financial services industries. Automotive companies have large financial services subsidiaries that act like banks for customers, which complicates the analysis. Banking, insurance, and financial services have operations that differ drastically from the usual industrial companies common in practice. While these companies can be analyzed, they present challenges for the beginning analyst.)

1.35

1.35 Analysis
Conduct a SWOT analysis of each of your companies. The aim is to understand the competitive position of each company so you can assess their financial statements in a broader business context.
PayPal Square
Strengths Strengths
Worldwide Operations Large Number of Customers Variety of Services Strong Tech Background User Friendly Active Users Wide range of products brewing Strong product Expansion policies Strong security Financial performance and position
Weaknesses Weaknesses
Exposure to Fraudulent Activities High Service Fee Controversies Depends on Internet Connection Restriction in Some Countries Gap between services covered Inventory management Employee turnover High competition
Opportunities Opportunities
Move Towards Lower Cash Economies Digital Cryptocurrency Linked with Business Online businesses Technological changes Government subsidies and policies Customer preferences
Threats Threats
Strong Economic Regulations & Policies Competitors Fraud & Hackers Banks/Financial Services Cybercrimes Changes in regulations Substitute products Low barriers to entry
Analyze the competitive environment of your chosen publicly traded company using the "five forces model".
Company 1 Company 2
Industry Competition Industry Competition
Amazon Pay Braintree Stripe Square Afterpay Authorize.net Klarna Intuit Plastiq Stripe First Data Corporation Paypal
Bargaining Power of Buyers Bargaining Power of Buyers
The number of suppliers in the industry in which PayPal Holdings operates is a lot more than the number of firms producing the products. This means that the buyers have a few firms to choose from, and therefore, do not have much control over prices. This makes the bargaining power of buyers a weaker force within the industry. PayPal Holdings can focus on innovation and differentiation to attract more buyers. Product differentiation and quality of products are important to buyers within the industry, and PayPal Holdings can attract a large number of customers by focusing on these. Buyers are often a demanding lot. They want to buy the best offerings available by paying the minimum price as possible. This put pressure on Square, Inc. profitability in the long run. The smaller and more powerful the customer base is of Square, Inc. the higher the bargaining power of the customers and higher their ability to seek increasing discounts and offers.
Bargaining Power of Suppliers Bargaining Power of Suppliers
The number of suppliers in the industry in which PayPal Holdings operates is a lot compared to the buyers. This means that the suppliers have less control over prices and this makes the bargaining power of suppliers a weak force. All most all the companies in the Internet Software & Services industry buy their raw material from numerous suppliers. Suppliers in dominant position can decrease the margins Square, Inc. can earn in the market. Powerful suppliers in Technology sector use their negotiating power to extract higher prices from the firms in Internet Software & Services field. The overall impact of higher supplier bargaining power is that it lowers the overall profitability of Internet Software & Services.
Threat of Substitution Threat of Substitution
There are very few substitutes available for the products that are produced in the industry in which PayPal Holdings operates. The very few substitutes that are available are also produced by low profit earning industries. This means that there is no ceiling on the maximum profit that firms can earn in the industry in which PayPal Holdings operates. All of these factors make the threat of substitute products a weaker force within the industry. The very few substitutes available are of high quality but are way more expensive. Comparatively, firms producing within the industry in which PayPal Holdings operates sell at a lower price than substitutes, with adequate quality. This means that buyers are less likely to switch to substitute products. This means that the threat of substitute products is weak within the industry. When a new product or service meets a similar customer needs in different ways, industry profitability suffers. For example services like Dropbox and Google Drive are substitute to storage hardware drives. The threat of a substitute product or service is high if it offers a value proposition that is uniquely different from present offerings of the industry.
Threat of Entry Threat of Entry
The economies of scale is fairly difficult to achieve in the industry in which PayPal Holdings operates. This makes it easier for those producing large capacitates to have a cost advantage. It also makes production costlier for new entrants. This makes the threats of new entrants a weaker force. New entrants in Internet Software & Services brings innovation, new ways of doing things and put pressure on Square, Inc. through lower pricing strategy, reducing costs, and providing new value propositions to the customers. Square, Inc. has to manage all these challenges and build effective barriers to safeguard its competitive edge.
Once you have completed this analysis, save the document and mark the step as complete on the "Project Workbook" page.

1.39

1.39 Access Reports Filed with the SEC
Use the SEC EDGAR website to locate the recent Form 10-K (or other annual report such as 20-F or 40-F) for each of your chosen companies. Download a spreadsheet version of financial statements. Save these financial statements to a cloud drive in a folder called "Form 10-K". For ease of access, paste the link to this folder in the box below:
Explore the financial statements and familiarize yourself with the company basics. The following give an indication of some questions that will guide us as we look for answers over the next few modules. Feel free to check the boxes as and when you get to these questions.
PayPal Square
Form 10-K : https://drive.google.com/file/d/1g1ifrnRYHKSjf4qEABHuLdyIttA4oY8s/view?usp=sharing Form 10-K : https://drive.google.com/file/d/1cVKZ3GWBatCAwBFJDWC5dPoaDdJYnqEM/view?usp=sharing
What accounting standards are used, U.S. GAAP, IFRS, or other? What accounting standards are used, U.S. GAAP, IFRS, or other?
What is the date of the most recent fiscal year-end? What is the date of the most recent fiscal year-end?
Determine the relative proportion of short- and long-term assets. Determine the relative proportion of short- and long-term assets.
Determine the relative proportion of liabilities and equity Determine the relative proportion of liabilities and equity
Calculate the return on assets (ROA) for the most recent year. Calculate the return on assets (ROA) for the most recent year.
Disaggregate ROA into the two component parts. Compare the numbers/ratios for each company. Disaggregate ROA into the two component parts. Compare the numbers/ratios for each company.
Find the companies’ audit reports. Who are the auditors? Are any concerns raised in the reports? Find the companies’ audit reports. Who are the auditors? Are any concerns raised in the reports?
Use the boxes below to record any notes or observations:
PayPal Square
What accounting standards are used, U.S. GAAP, IFRS, or other? U.S. GAAP
What is the date of the most recent fiscal year-end? Dec. 31 2020
Determine the relative proportion of short- and long-term assets. 12% (short term/total assets)
Determine the relative proportion of liabilities and equity $2.51 (liabilities/equity)
Calculate the return on assets (ROA) for the most recent year. 7% (net income/average of total assets)
Disaggregate ROA into the two component parts. Compare the numbers/ratios for each company.
Find the companies’ audit reports. Who are the auditors? Are any concerns raised in the reports?
Once you have done this, save the document and mark the step as complete on the "Project Workbook" page.

http://www.sec.gov/ https://drive.google.com/file/d/1g1ifrnRYHKSjf4qEABHuLdyIttA4oY8s/view?usp=sharing https://drive.google.com/file/d/1cVKZ3GWBatCAwBFJDWC5dPoaDdJYnqEM/view?usp=sharing

2.19

2.18 Access Additional Information Sources
In this step, you are required to access as many of the additional information sources as possible to acquire deeper insight into the operating activities of your company. Save any additional information you have been able to source to your cloud drive in a folder called "Additional Information Sources". For ease of access, paste the link to this folder below:
PayPal Square
Additional Information Sources: Additional Information Sources:
Use the boxes below to record any notes or observations:
Once you have done this, save the document and mark the step as complete on the "Project Workbook" page.

3.9

3.8 The Balance Sheet and the Income Statement (Analysis)
Analyze the balance sheet and income statement for your publicly traded companies, and then complete the following:
Prepare a common-size balance sheet. To facilitate this, you should have obtained the balance sheet in spreadsheet form from the SEC website at the “Interactive Data” link on the search results page. Look for major differences over time. Some questions to consider:
What are the company’s largest assets?
PayPal Square
What are the company's largest liabilities?
PayPal Square
What proportion of total assets is financed by owners? (Hint: Compare with total equity.)
PayPal Square
What proportion of total assets is financed by nonowners?
PayPal Square
Prepare a common-size income statement. Express each item on the income statement as a percent of total sales or revenue. Do this for all years on the income statement. Look for major differences over time and between the companies. Do any patterns emerge? Some questions to consider:
What are the major expenses?
PayPal Square
Are there any unusual or discontinued items? Are they large in magnitude?
PayPal Square
Was the company more or less profitable when compared with the prior year?
PayPal Square
Once you have done this, save the document and mark the step as complete on the "Project Workbook" page.

3.19

3.19 The Statement of Cash Flows and The Statement of Stockholders' Equity (Analysis)
Analyze the financial statements for your publicly traded companies, and then complete the questions that are most relevant to an anlysis of each company.
Determine the size and direction (cash source or use) of cash flows from operations, investing, and financing. One goal is to understand the company’s pattern of cash flows and to form an opinion about the general strength of its cash flows. Some questions to consider:
What were the cash flows from operations? Were they positive?
Square Square
Were operating cash flows smaller or larger than net income?
Square Square
Were operating cash flows smaller or larger than net income?
Square Square
Did the company generate or use cash from investing activities?
Square Square
Did the company generate or use cash from financing activities?
Square Square
Determine the market capitalization at the most recent year-end. Determine the number of shares outstanding from the balance sheet. Recall that shares outstanding is total shares issued less any treasury shares. Obtain the year-end stock price from an investment website such as Seeking Alpha or Yahoo Finance. Compare market cap with the book value (total equity) of the company.
Square Square
Once you have done this, save the document and mark the step as complete on the "Project Workbook" page.

5.33

5.32 Analyzing and Interpreting the Financial Statements
Analyze the financial statements for your publicly traded companies, and then complete the questions that are most relevant to an anlysis of each company.
Analysis of financial statements commonly includes ROE disaggregation and scrutiny of its components as explained in the previous module. Analyze the financial statements for your publicly traded companies, and then complete the questions that are most relevant to an anlysis of each company:
One of Warren Buffett’s acquisition criteria is to invest in businesses “earning good return on equity.” The ROE formula uses both net income and stockholders’ equity. Why is it important to relate net income to stockholders’ equity?
Why isn’t it sufficient to merely concentrate on companies with the highest net income?
Compute ROE for all three years reported on the income statement. (Hint: Do your companies report noncontrolling interest on the income statement and balance sheet? If so, make certain to use income available to the controlling interest (NICI) in the numerator and equity of the controlling interest (CI) in the denominator. To compute ROE for three years, we must determine average stockholders’ equity for three years, which means we need four balance sheet amounts. Because the balance sheets of each company will report only two years, we must collect prior years’ financial statements.)
PayPal Square
Compute RNOA and its two components (NOPM and NOAT) for all three years reported on the income statement. (Hint: We must use balance sheet numbers for four years to obtain three averages of net operating assets. Examine the income statements and balance sheets to determine the operating and nonoperating items. Use an online source to understand any line items not described in the textbook. Use cell references in the spreadsheet to compute NOPAT and NOA and the various ratios.)
PayPal Square
Compare ROE and RNOA and identify differences over time and between the companies
Evaluate the companies’ returns and answer questions such as the following:
Which company is more profitable?
How do the operating and nonoperating portions of ROE compare?
Is the net operating profit margin similar for the two companies? Given that they are roughly in the same industry, major differences should prompt further exploration.
Are the companies’ net operating asset turnover ratios similar or markedly different? Calculate and compare the cash conversion cycle for each year
Determine FLEV and Spread and the noncontrolling interest ratio (if applicable)
Show that: ROE = [RNOA + (FLEV × Spread)] × Noncontrolling interest ratio
Compare the components of the equation for each company over time and follow up on any differences.
PayPal Square
Computing ratios
Compute the following four ratios from for the recent three years for each company:
Current Ratio
PayPal Square
Quick Ratio
PayPal Square
Liabilities-to-Equity
PayPal Square
Times Interest Earned
PayPal Square
Compare the ratios for the companies under analysis and identify differences over time and between companies. Evaluate each company’s ability to pay its debts in the short term (liquidity) and the long term (solvency), and in the process address the following:
Which company is more liquid? More solvent?
Do the ratios change over time? If yes, does the change make sense given the economic and competitive factors that affect the industry and the companies?
Once you have completed this analysis, save the document and mark the step as complete on the "Project Workbook" page.

6.34

6.33 Revenues, Receivables, and Operating Expenses
Analyze the financial statements for your publicly traded companies, and then complete the questions that are most relevant to an anlysis of each company.
Analysis of financial statements commonly includes operating income and its components as explained in the previous module. Analyze the financial statements for your publicly traded companies, and then complete the questions that are most relevant to an anlysis of each company:
Revenues
This is the largest item on the income statement, and we must assess it on a quantitative and qualitative basis.
What is a performance obligation and how is it related to revenue recognition?
How can management shift income from one period into another by using the allowance for uncollectibles account?
Use horizontal analysis to identify any time trends.
PayPal Square
Consider the current economic environment and the companies’ competitive landscape. Given they operate in the same industry, you might expect similar revenue trends. Read the management’s discussion and analysis (MD&A) section of the 10-K to learn how the companies’ senior managers explain revenue levels and changes Our goal is to determine whether each company’s revenue levels and changes seem appropriate and in line with external factors.
If the company distinguishes among types of revenue on the income statement, use horizontal and vertical analyses to identify any changes in the product line mix or where sales are growing most quickly. Find the footnote on segment revenues and profits, and identify trends or significant changes.
PayPal Square
Assess each company’s revenue recognition policy by comparing it with the other and with those of some other close competitors.
PayPal Square
If your companies operate globally, determine the effect of foreign currency fluctuations on revenue. If these are substantial year after year, it might indicate that managers are not effectively hedging, and this would warrant additional investigation.
PayPal Square
Accounts Receivable
The following provides some structure for analyzing a company’s accounts receivable. For each point of analysis, compare across companies and over time. The goal is to determine whether each company’s accounts receivable (levels and changes) seems appropriate and to gauge the quality of the receivables.
Are sales primarily on credit, or is a typical sale transacted in cash? Consider the industry and the companies’ business model.
PayPal Square
What is the relative size of accounts receivable? How has this changed over the recent three-year period?
PayPal Square
What did the company record for bad debt expense? Compute the common size amount.
PayPal Square
Compute accounts receivable turnover and days sales outstanding for all three years reported on the income statement. You will need to obtain additional balance sheet information to be able to compute average balances for the denominator.
PayPal Square
Does the company have any large customers that increase its credit risk?
PayPal Square
Operating Expenses
Analyze the income statement items.
Prepare a common-sized income statement by dividing each item on the income statement by total revenues, net.
PayPal Square
Compare the common-sized values for the three years presented in the income statement. What changes are there, if any? Are material changes explained in the MD&A? Do the explanations seem reasonable given the current economic environment?
PayPal Square
Does the company engage in research and development activities? Quantify the amount in dollar terms and common size. Do you observe any patterns? Is the level of R&D expense consistent with peers and industry?
PayPal Square
Does the company have discontinued operations? If so, how will this impact future operations?
PayPal Square
Accounting Quality
Evaluating accounting quality is more of an art than a science. The point is to form an overall opinion about the reliability of the numbers in the financial statements.
Does the company report non-GAAP earnings? What items do they exclude or include? Do the two companies report similar one-time items? Do the items seem reasonable, or do we detect some self-serving disclosures?
PayPal Square
Use an online investment website to find key ratios for close competitors. Compare to our companies.
PayPal Square
Find the consensus analysts’ EPS forecast for the recent year-end. How did our companies fare? Were there any one-time items or unusual changes in any expenses that might have caused the company to just meet or beat the forecast?
PayPal Square
Once you have completed this analysis, save the document and mark the step as complete on the "Project Workbook" page.

7.32

7.32 Inventories, Accounts Payable and Long-Term Assets
Analyze the financial statements for your publicly traded companies, and then complete the questions that are most relevant to an anlysis of each company:
Inventories
The following provides some structure for analyzing a company’s inventory. For each point of analysis, compare across companies and over time.
What is inventory for the company? Does the company manufacture inventory? What proportion of total inventory is raw materials? Work in process? Finished goods?
PayPal Square
Compare the two companies’ inventory costing methods. Adjust LIFO inventory and cost of goods sold if the company uses LIFO. Is the LIFO reserve significant? Estimate the tax savings associated with LIFO costing method. Use the adjusted COGS and inventory figures for all calculations and ratios.
PayPal Square
What is the relative size of inventory? How has this changed over the recent three-year period?
PayPal Square
Compute inventory turnover and days inventory outstanding and the cash conversion cycle for all three years reported on the income statement.
PayPal Square
Compute gross profit margin in percentage terms. Consider the current economic environment and the companies’ competitive landscape. Can we explain any changes in gross profit levels?
PayPal Square
Have costs for raw materials and labor increased during the year? Have sales volumes softened?
PayPal Square
What has happened to unit prices? Read the MD&A to determine senior management’s take.
PayPal Square
Does the company face any inventory-related risk? What has been done to mitigate this risk? Read the MD&A.
PayPal Square
Tangible Assets
The following provides some structure to analyzing the companies’ long-term (tangible) assets. For each point of analysis, compare across companies and over time.
Are tangible assets significant for the companies? What proportion of total assets is held as tangible assets (PPE)? What exactly are the companies’ tangible assets? That is, what is their nature?
PayPal Square
Compare the two companies’ depreciation policies. Do they differ markedly?
PayPal Square
What is the relative size of tangible assets? How has this changed over the three-year period?
PayPal Square
Did the company increase tangible assets during the year? Was the increase for outright asset purchases or did the company acquire assets via a merger or acquisition?
PayPal Square
Compute PPE turnover.
PayPal Square
Compute the average age of assets and percentage used up.
PayPal Square
Are any assets impaired? Is the impairment charge significant? Is the impairment specific to the company or is the industry experiencing a downturn?
PayPal Square
Restructuring Activities
The following provides some structure to analyzing the companies’ restructuring activities. For each point of analysis, compare across companies and over time.
Determine the amount of the expense on the income statement—look in the footnotes or the MD&A for additional information.
PayPal Square
Are other close competitors also restructuring during this time period?
PayPal Square
Read the footnotes and assess the company’s restructuring plans. How many years will it take to fully execute the plan? What additional expenditures are required?
PayPal Square
Find the restructuring liability on the balance sheet (again the notes will help). Does the liability seem reasonable over time? Compare it to total assets and total liabilities each year and look for any patterns.
PayPal Square
Once you have completed this analysis, save the document and mark the step as complete on the "Project Workbook" page.

8.31

8.31 Current and Long-Term Liabilities
Analyze the financial statements for your publicly traded companies and then complete the questions that are most relevant to an anlysis of each company:
What does the term current liabilities mean? What assets are usually used to settle current liabilities?
What is an accrual? How do accruals impact the balance sheet and the income statement?
How would you analyze accruals for your company? What do you find when you perform said analysis?
PayPal Square
What is the difference between a bond’s coupon rate and its market interest rate (yield)?
What is the WACC for your company? How much of its capitalization is long-term debt? Is this debt good, bad or neither? Explain.
PayPal Square
Why do companies report a gain or loss when they repurchase their bonds? Is this a real economic gain or loss?
How do credit (debt) ratings affect the cost of borrowing for a company? How is the credit rating for your company? Why does it have that rating? Has it changed recently?
PayPal Square
How would you interpret your company’s reported gain or loss on the repurchase of its bonds? Do you see any such activity? Where would you look to find it, if it occurs?
PayPal Square
Once you have completed this analysis, save the document and mark the step as complete on the "Project Workbook" page.

9.31

9.31 Stock Transactions, Dividends and EPS
Analyze the financial statements for your publicly traded companies, and then complete the questions that are most relevant to an anlysis of each company.
Company analysis should consider how the companies are financed and what transactions were executed with stockholders during the recent year.
Contributed Capital
Use the balance sheet and the statement of stockholders’ equity to determine how the company has structured its equity.
What proportion of assets are financed with equity?
PayPal Square
Shareholder Equity Ratio = Total Shareholder Equity / Total Assets: = .285 or 29% Shareholder Equity Ratio = Total Shareholder Equity / Total Assets: = .271 or 27%
What classes of equity does the company have? What transactions occurred during the year?
PayPal Square
Common Stock Preferred Stock
Does the company have treasury stock? Read the MD&A and the footnotes to determine the main reason for holding treasury stock. Assess the treasury stock transactions during the year. How much was spent and/or received? What did the company do with the proceeds? Compare the average price paid for treasury shares to the current stock price.
PayPal Square
Does the company use share-based compensation? What types of plans are used? What was the magnitude of the compensation? What is the magnitude of the outstanding (unvested) options and/or shares? Com-pare the level of treasury shares to outstanding (unvested) options and/or shares.
PayPal Square
Compute the market capitalization of the firms and compare to the book value of equity. Find an online source for the average market-to-book ratio for the industry and see where the firms fit. Follow up on anything unusual.
PayPal Square
Earned Capital
Recall that the least costly form of financing is internal—that is, plowing earned profits (and cash) into new investments is a low-cost means to grow the company and return even more to stockholders.
How profitable were the companies? Compare return on equity for the three-year period and determine causes for major differences over time and between companies.
PayPal Square
Review accumulated other comprehensive income and determine the main components of that account. How did AOCI change during the year?
PayPal Square
Did the companies pay dividends? Compute the dividend payout and the dividend yield for all three years and compare them.
PayPal Square
Did the company have any stock splits?
PayPal Square
Convertible Securities
Read the debt footnote to determine if the company has any convertible securities.
What types of convertible securities are outstanding?
PayPal Square
Are these securities substantive? To assess this, consider their common size and their effect on diluted earnings per share.
PayPal Square
Did the company have any convertible transactions during the year? If yes, determine the effect on the balance sheet and income statement.
PayPal Square
Once you have completed this analysis, save the document and mark the step as complete on the "Project Workbook" page.

10.29

10.29 Intercorporate Investments
Analyze the financial statements for your publicly traded companies, and then complete the questions that are most relevant to an anlysis of each company.
Company analysis should include an assessment of the companies’ various investments, transactions during the year, the effect on net income, and the balance sheet results at year-end.
Investments in Marketable Securities
To analyze nonoperating investments in marketable debt and equity securities, consider the following questions that will help us understand both companies’ level of excess cash and how they invest it:
What is the magnitude of the investments in common-size terms? Has this changed over time?
PayPal Square
What proportion is short-term versus long-term?
PayPal Square
What types of investments does the company hold—debt, equity, private-company equity?
PayPal Square
What explanation do the companies provide for their level of investments? Does the MD&A section of the Form 10-K discuss plans for expansion or other strategic initiatives that would require cash?
PayPal Square
Investments with Significant Influence
Our goal is to assess how the companies structure their operations to better understand their strategies.
What types of investments does the company have: associates, joint ventures, or other?
PayPal Square
Why does the company engage in equity-method investments; what is their intent? Read the MD&A section of the Form 10-K and the financial statement footnotes.
PayPal Square
What are the main equity-method investments? (IFRS: Does the company have any proportionate consolidation?) How large are these in common-size terms?
PayPal Square
Have there been changes during the year in terms of new investments or disposals? The MD&A and footnotes will be instructive.
PayPal Square
Are the equity method investments profitable? Do they provide cash dividends?
PayPal Square
Investments with Control (Consolidation)
Most multinational corporations are consolidated entities that structure their operations to meet many goals, including legal requirements, tax planning, and foreign ownership restrictions. Financial statements will not report information to completely comprehend all these intricacies; the goal here is to understand the companies’ structure at a very high level.
What types of companies does the company control? What are the main subsidiaries?
PayPal Square
What strategic advantages do these subsidiaries afford? Foreign? Domestic? Supplier or distributors?
PayPal Square
Read the MD&A section of the Form 10-K and the financial statement footnotes to learn about strategic investment and plans for the future. Have there been new investments during the year? How were these acquisitions financed (debt, equity)?
PayPal Square
Did these yield intangible assets including goodwill? What proportion of the acquisition price was allocated to intangibles?
PayPal Square
Gauge the significance of previously acquired intangibles in common-size terms. Have any been impaired during the year?
PayPal Square
If the company reports subsidiary-level profit, which are the most profitable? The least?
PayPal Square
Once you have completed this analysis, save the document and mark the step as complete on the "Project Workbook" page.

11.27

11.27 Leases, Pensions and Income Taxes
Analyze the financial statements for your publicly traded companies, and then complete the questions that are most relevant to an anlysis of each company.
Company analysis should include a discussion of leases (capital and operating), defined benefit obligations, as well as deferred tax assets and liabilities. The objective is to gain a deeper understanding of all the obligations the company faces and how they affect key performance and leverage ratios.
Finances and Operating Leases
Read the debt and lease footnotes to determine whether the company uses leases.
Does the company use leases? What types of assets are leased?
PayPal Square
What proportion of leases are finance versus operating?
PayPal Square
Are leases a substantial component of overall financing?
PayPal Square
Determine the discount rate implicit in the company’s leases.
PayPal Square
Has the company adopted the new standard for leases? What was the balance sheet impact of the adoption?
PayPal Square
Pensions
Read the pension footnote to determine whether the company has defined benefit obligations.
What is the funded status of the pension and other benefits plans? Is the underfunded or overfunded obligation substantial? Compare between the companies.
PayPal Square
Are the plans substantial to the company?
PayPal Square
How much pension expense does each company report in its income statement? Is this a substantial amount?
PayPal Square
Compare the cash paid into the plan assets to the amounts paid to retirees. Assess the cash flow implications of the company’s future payment obligations. The point is to determine whether the company will be able to meet its obligations as they come due.
PayPal Square
Income Tax Disclosures and Strategies
Examine the income tax expense and deferred tax assets and liabilities.
Analyze the footnotes and assess the company’s effective tax rate. Is it a consistent rate? If not, do the fluctuations seem reasonable?
PayPal Square
What was the effect of the 2017 TCJA on the provision for income taxes? How did the new law change the company's effective tax rate?
PayPal Square
Do the deferred tax assets and liabilities seem appropriate given the company’s industry?
PayPal Square
Is there a valuation allowance? If so, how big is it relative to total deferred tax assets? Has the valuation allowance changed markedly during the year? This might indicate income shifting.
PayPal Square
Once you have completed this analysis, save the document and mark the step as complete on the "Project Workbook" page.

12.20

12.20 Cash Flows and Valuation
Analyze the financial statements for your publicly traded companies, and then complete the questions that are most relevant to an anlysis of each company.
Two common models used to estimate the value of company’s equity are the discounted cash flow (DCF) model and the residual operating income (ROPI) model. Estimate the value of equity and a stock price for the company(ies) under analysis. The aim is to determine an independent measure of value and assess whether the stock appears to be over- or under- valued.
Begin with a forecast of the company’s balance sheet and income statement:
Balance Sheet PayPal Balance Sheet Square
Income StatementPayPal Income Statement Square
Model Assumptions and Inputs
In addition to the assumptions used for the forecasts, we require several additional inputs.
Weighted average cost of capital (WACC) is required to discount future amounts to derive present values. We can find estimates at a number of websites. Find the latest WACC at three or more sites and explore why they differ. One approach would be to use an average in the calculation and then perform sensitivity analysis for the high and the low in the range.
PayPal Square
Net nonoperating obligations (NNO) is needed to determine the value of equity from total enterprise value.
PayPal Square
Number of shares outstanding. Recall that shares outstanding is equal to shares issued less treasury shares. The balance sheet typically reports both numbers but if not, we can find the amounts in the statement of shareholders’ equity or in a footnote.
PayPal Square
Model Estimation
Use a spreadsheet and estimate the DCF and the ROPI models respectively. Here are some tips:
Pay close attention to the rounding conventions described in the footnotes in Exhibits 13.3 and 13.4. Use the spreadsheet rounding functions. Note: Setting the format of a cell to “no decimals” is not the same as rounding the number; with the former, the decimals are still there, but they are not displayed. Make sure that NNO is subtracted from total enterprise value. In some cases, NNO is a negative number; this occurs when nonoperating assets such as cash and marketable securities exceed nonoperating liabilities. By subtracting this negative NNO, the value of equity will be greater than the enterprise value of the firm. The stock prices obtained are point estimates derived from a specific set of assumptions. To understand the impact of each assumption, compute alternative stock prices by varying the assumptions. The point is to determine a range of stock prices that derive from a reasonable set of assumptions. One approach is to increase and decrease each of the model assumptions by a reasonable amount such as +/− 10%. Use the spreadsheet functions to perform this sensitivity analysis. Identify which assumptions are most important or impactful.
DCF Model
PayPal Square
ROPI Model
PayPal Square
Interpretation
The final step in the project is to evaluate the companies based on all the analysis performed in the ongoing project.
Revisit the conclusions made about the companies’ performance (profit and margin analysis), asset efficiency, solvency, liquidity, off-balance-sheet financing, and future opportunities based on analysis of strengths, weaknesses, opportunities, and threats. Our goal is to assimilate the various components of analysis and to synthesize what we discovered and learned.
PayPal Company 2
Access one or more analyst reports for each company. How do the other professionals see the firms? How does their view differ from ours?
PayPal Company 2
Our analysis was based primarily on historical data from financial statements. What additional information would we like to have to refine our opinion? Is this missing information critical to our opinion?
PayPal Company 2
Based on our analysis, would you consider investing in the company? Explain
PayPal Company 2
Once you have completed this analysis, save the document and mark the step as complete on the "Project Workbook" page.