Financial Accounting Project
reneechrissy
Project2_Steps1-3Worksheet.xlsxInstructions
Choice Hotels 10-K In Project 2, you will learn how to access US Securities and Exchange Commission public information about companies. You will also learn how to complete a horizontal analysis and to calculate and analyze ratios. Start by looking up the 10-K for Choice Hotels (CHH) for year 2018 on the SEC website. Follow these steps: 1. Go to www.SEC.gov. 2. At the top on the right, click Company Filings. 3. In the fast search box, enter the Ticker Symbol for Choice Hotels, CHH. 4. Click Search 5. EDGAR search results will appear. Notice the name and address for Choice Hotels. Also notice the box that reads Filter Results: Filing Type. Enter "10-K" and click Search. 6. You should see a 10-K with a filing date of 2019-02-26. This is the latest available at the time this project was developed. 7. There are two available formats of this 10-K data, and we will use the Documents to answer the questions. You will use the data provided in the worksheets to complete the Ratio Analysis and to answer related questions. 8. Complete the horizontal analysis of financial statements by filling in each grey box. 9. Answer all questions on each tab in this workbook. 10. Explain the significance of your ratio calculations. Note: Quarterly Financial Statements are not audited. Only annual financial statements are audited by a public accounting firm.
Choice Hotels 10-K In Project 2, you will learn how to access US Securities and Exchange Commission public information about companies. You will also learn how to complete a horizontal analysis and to calculate and analyze ratios. Start by looking up the 10-K for Choice Hotels (CHH) for year 2019 on the SEC website. Follow these steps: 1. Go to www.SEC.gov. 2. At the top on the right, click Company Filings. 3. In the fast search box, enter the Ticker Symbol for Choice Hotels, CHH. 4. Click Search 5. EDGAR search results will appear. Notice the name and address for Choice Hotels. Also notice the box that reads Filter Results: Filing Type. Enter "10-K" and click Search. 6. You should see a 10-K with a filing date of 2020-03-02. This is the latest available at the time this project was developed. 7. There are two available formats of this 10-K data, and we will use the Documents to answer the questions. You will use the data provided in the worksheets to complete the Ratio Analysis and to answer related questions. 8. Complete the horizontal analysis of financial statements by filling in each grey box. 9. Answer all questions on each tab in this workbook. 10. Explain the significance of your ratio calculations. Note: Quarterly Financial Statements are not audited. Only annual financial statements are audited by a public accounting firm.
10-K Document Questions
Read pages 4 and 5 in the 10-K. This is the overview of the business. Use the 2018 and 2019 SEC 10-K reports to answer the following questions:
1. Discuss Choice Hotels’ business model.
Answer:
2. On page 5, there is a sentence that reads in part, "Historically, we have returned value to our shareholders in two primary ways:" What are the two ways?
Answer:
3. Choice Hotels is a company that has grown to over $1 billion in assets in 2018. So $100 million is a big number for Choice. How much did Choice Hotels pay as a Special Dividend in 2012?
Answer:
Note: The Business section continues to page 23, where the Risk section begins. A consultant would be well advised to read all of both sections. The items in 10-K Risk section are designed to give full disclosure. Of more interest is a section starting on page 37: Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (MD&A) This is where management tells shareholders what happened and why. The following questions apply to the MD&A.
4. What happened on February 1, 2018? Hint: You may find it useful to read Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Answer:
5. Which 3 of the risks in Item 1A are the most significant? Explain your reasons for selecting them.
Answer:
Income Statement
| (New-Old)/Old | (New-Old)/Old | |||||||
| Horizontal Analysis | 12 Months Ended | |||||||
| Consolidated Statements of Income - USD ($) in Thousands | Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2017 | $ Change 2018 to 2019 | % Change 2018 to 2019 | $ Change 2017 to 2018 | % Change 2017 to 2018 | |
| REVENUES: | ||||||||
| Royalty fees | $388,151 | $376,676 | $341,745 | |||||
| Initial franchise and relicensing fees | $27,489 | $26,072 | $23,038 | |||||
| Procurement services | $61,429 | $52,088 | $40,451 | |||||
| Marketing and reservation system | $577,426 | $543,677 | $499,625 | |||||
| Owned Hotels | $20,282 | $0 | $0 | |||||
| Other | $40,043 | $42,791 | $36,438 | |||||
| Total revenues | $1,114,820 | $1,041,304 | $941,297 | |||||
| OPERATING EXPENSES: | ||||||||
| Selling, general and administrative | $168,833 | $170,027 | $165,821 | |||||
| Depreciation and amortization | $18,828 | $14,330 | $6,680 | |||||
| Marketing and reservation system | $579,139 | $534,266 | $479,400 | |||||
| Owned Hotels | $14,448 | $0 | $0 | |||||
| Total operating expenses | $781,248 | $718,623 | $651,901 | |||||
| Impairment of goodwill | -$3,097 | -$4,289 | $0 | |||||
| Gain on sale of assets, net | $100 | $82 | $257 | |||||
| Operating income | $318,642 | $318,474 | $289,653 | |||||
| OTHER INCOME AND EXPENSES, NET: | ||||||||
| Interest expense | $46,807 | $45,908 | $45,039 | |||||
| Interest income | -$9,996 | -$7,452 | -$5,920 | |||||
| Loss on extinguishment of debt | $7,188 | $0 | $0 | |||||
| Other (gain) loss | -$4,862 | $1,437 | -$3,229 | |||||
| Equity in net (income) loss of affiliates | $9,576 | $5,323 | $4,546 | |||||
| Total other income and expenses, net | $48,713 | $45,216 | $40,436 | |||||
| Income before income taxes | $269,929 | $273,258 | $249,217 | |||||
| Income taxes | $47,051 | $56,903 | $126,890 | |||||
| Net income | $222,878 | $216,355 | $122,327 | |||||
| Basic earnings per share: | ||||||||
| Basic earnings per share (in dollars per share) | $4.00 | $3.83 | $2.16 | |||||
| Diluted earnings per share (in dollars per share) | $3.98 | $3.80 | $2.15 | |||||
| Questions: | ||||||||
| 1. what type of information do you get from reading income statement? Please be specific. | ||||||||
| 2. what are the examples of selling, general and administrave expenses. Please list at least 3 of them. | ||||||||
| 3. The largest item in revenue and in expense is Marketing and reservation system. What are these two items and why are the two numbers similar but not identical? | ||||||||
| 4. what's the benefit of horizonal analysis for users of financial statements? | ||||||||
| 5. There are at least two different definition of incomes in the current statement above; operating income and net income. | ||||||||
| Why do you think investers need to know operating income when they have net income? |
Balance Sheet
| (New-Old)/Old | |||||
| Horizontal Analysis | 12 Months Ended | ||||
| Consolidated Balance Sheets - USD ($) $ in Thousands | Dec. 31, 2019 | Dec. 31, 2018 | $ Change 2018 to 2019 | % Change 2018 to 2019 | |
| Current assets | |||||
| Cash and cash equivalents | $33,766 | $26,642 | |||
| Receivables (net of allowance for doubtful accounts of $18,482 and $15,905, respectively) | $141,566 | $138,018 | |||
| Income taxes receivable | $11,126 | $10,122 | |||
| Notes receivable, net of allowances | $25,404 | $36,759 | |||
| Other current assets | $24,727 | $32,243 | |||
| Total current assets | $236,589 | $243,784 | |||
| Property and equipment, at cost, net | $351,502 | $127,535 | |||
| Operating lease right-of-use assets | $24,088 | $0 | |||
| Goodwill | $159,196 | $168,996 | |||
| Intangible assets, net | $290,421 | $271,188 | |||
| Notes receivable, net of allowances | $103,054 | $83,440 | |||
| Investments, employee benefit plans, at fair value | $24,978 | $19,398 | |||
| Investments in unconsolidated entities | $78,655 | $109,016 | |||
| Deferred income taxes | $20,747 | $30,613 | |||
| Other assets | $97,442 | $84,400 | |||
| Total assets | $1,386,672 | $1,138,370 | |||
| Current liabilities | |||||
| Accounts payable | $73,449 | $73,511 | |||
| Accrued expenses and other current liabilities | $90,364 | $92,651 | |||
| Current portion | $71,594 | $67,614 | |||
| Liability for guest loyalty program | $82,970 | $83,566 | |||
| Current portion of long-term debt | $7,511 | $1,097 | |||
| Total current liabilities | $325,888 | $318,439 | |||
| Long-term debt | $844,102 | $753,514 | |||
| Long-term portion | $112,662 | $110,278 | |||
| Deferred compensation and retirement plan obligations | $29,949 | $24,212 | |||
| Income taxes payable | $26,147 | $26,276 | |||
| Operating lease liabilities | $21,270 | $0 | |||
| Liability for guest loyalty program | $46,698 | $52,327 | |||
| Other liabilities | $3,467 | $37,096 | |||
| Total liabilities | $1,410,183 | $1,322,142 | |||
| Commitments and Contingencies | |||||
| Common stock, $0.01 par value; 160,000,000 shares authorized; 95,065,638 shares issued at December 31, 2019 and December 31, 2018; 55,702,628 and 55,679,207 shares outstanding at December 31, 2019 and December 31, 2018, respectively | $951 | $951 | |||
| Additional paid-in-capital | $231,160 | $213,170 | |||
| Accumulated other comprehensive loss | -$4,550 | -$5,446 | |||
| Treasury stock, at cost; 39,363,010 and 39,386,431 shares at December 31, 2019 and December 31, 2018, respectively | -$1,219,905 | -$1,187,625 | |||
| Retained earnings | $968,833 | $795,178 | |||
| Total shareholders’ deficit | -$23,511 | -$183,772 | |||
| Total liabilities and shareholders’ deficit | $1,386,672 | $1,138,370 | |||
| Questions: | |||||
| 1. What types of information you can get from the balance sheet? | |||||
| 2. What does the “Accrued expenses and other current liabilities” item represent? | |||||
| 3. Why would a firm want to acquire treasury stock? | |||||
| 4. What does the “Long-term debt” item represent? | |||||
| 5. What is the most significant trend based on your horizontal analysis over this two-year period? Why? |
Statement of Cash Flows
| Consolidated Statements of Cash Flows - USD ($) $ in Thousands | 12 Months Ended | |||
| Dec. 31, 2019 | Dec. 31, 2018 | Dec. 31, 2017 | ||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||
| Net income | $ 222,878 | $ 216,355 | $ 122,327 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||
| Depreciation and amortization | $ 18,828 | $ 14,330 | $ 6,680 | |
| Depreciation and amortization - marketing and reservation system | $ 17,294 | $ 19,597 | $ 20,609 | |
| Franchise agreement acquisition cost amortization | $ 7,992 | $ 9,239 | $ 7,191 | |
| Impairment of goodwill | $ 3,097 | $ 4,289 | $ - 0 | |
| Impairment of long-lived assets | $ 7,259 | $ - 0 | $ - 0 | |
| Loss on sale of business | $ 4,674 | $ - 0 | $ - 0 | |
| Loss on debt extinguishment | $ 7,188 | $ - 0 | $ - 0 | |
| Gain on disposal of assets, net | $ (2,103) | $ (56) | $ (237) | |
| Provision for bad debts, net | $ 8,240 | $ 10,542 | $ 5,514 | |
| Non-cash stock compensation and other charges | $ 17,615 | $ 15,986 | $ 22,857 | |
| Non-cash interest and other investment (income) loss | $ (4,010) | $ 3,695 | $ (772) | |
| Deferred income taxes | $ 9,810 | $ (3,510) | $ 57,106 | |
| Equity in net losses from unconsolidated joint ventures, less distributions received | $ 12,562 | $ 7,389 | $ 6,579 | |
| Franchise agreement acquisition cost, net of reimbursements | $ (38,944) | $ (52,929) | $ (30,638) | |
| Change in working capital and other, net of acquisition | $ (21,824) | $ (2,031) | $ 40,158 | |
| Net cash provided by operating activities | $ 270,556 | $ 242,896 | $ 257,374 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||
| Investment in property and equipment | $ (57,342) | $ (47,673) | $ (23,437) | |
| Investment in intangible assets | $ (6,699) | $ (1,803) | $ (2,517) | |
| Proceeds from sales of assets | $ 10,585 | $ 3,053 | $ 1,000 | |
| Asset acquisition, net of cash acquired | $ (168,954) | $ (3,179) | $ - 0 | |
| Proceeds from sale of unconsolidated joint venture | $ 8,937 | $ - 0 | $ - 0 | |
| Business acquisition, net of cash acquired | $ - 0 | $ (231,317) | $ - 0 | |
| Payment on business disposition, net | $ (10,783) | $ - 0 | $ - 0 | |
| Contributions to equity method investments | $ (27,828) | $ (9,604) | $ (50,554) | |
| Distributions from equity method investments | $ 10,241 | $ 1,429 | $ 4,569 | |
| Purchases of investments, employee benefit plans | $ (3,175) | $ (2,895) | $ (2,447) | |
| Proceeds from sales of investments, employee benefit plans | $ 2,217 | $ 2,825 | $ 2,245 | |
| Issuance of notes receivable | $ (20,722) | $ (36,045) | $ (19,738) | |
| Collections of notes receivable | $ 14,231 | $ 4,997 | $ 655 | |
| Other items, net | $ (1,875) | $ (1,040) | $ 109 | |
| Net cash used in investing activities | $ (251,167) | $ (321,252) | $ (90,115) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||
| Proceeds from issuance of long term debt | $ 422,376 | $ 9,037 | $ - 0 | |
| Net (repayments) borrowings pursuant to revolving credit facilities | $ (72,400) | $ 20,600 | $ (115,003) | |
| Principal payments on long-term debt, including premium on extinguishment | $ (256,809) | $ (603) | $ (660) | |
| Debt issuance costs | $ (3,936) | $ (2,590) | $ - 0 | |
| Purchases of treasury stock | $ (50,638) | $ (148,679) | $ (9,807) | |
| Dividends paid | $ (48,089) | $ (48,715) | $ (48,651) | |
| (Payments on) proceeds from transfer of interest in notes receivable | $ (24,409) | $ 173 | $ 24,237 | |
| Proceeds from exercise of stock options | $ 21,410 | $ 41,360 | $ 14,107 | |
| Net cash used in financing activities | $ (12,495) | $ (129,417) | $ (135,777) | |
| Net change in cash and cash equivalents | $ 6,894 | $ (207,773) | $ 31,482 | |
| Effect of foreign exchange rate changes on cash and cash equivalents | $ 230 | $ (921) | $ 1,391 | |
| Cash and cash equivalents at beginning of period | $ 26,642 | $ 235,336 | $ 202,463 | |
| Cash and cash equivalents at end of period | $ 33,766 | $ 26,642 | $ 235,336 | |
| Cash payments during the year for: | ||||
| Income taxes, net of refunds | $ 41,859 | $ 77,357 | $ 39,181 | |
| Interest, net of capitalized interest | $ 48,179 | $ 43,254 | $ 42,405 | |
| Non-cash investing and financing activities: | ||||
| Dividends declared but not paid | $ 12,535 | $ 11,977 | $ 12,185 | |
| Investment in property, equipment and intangibles acquired in accounts payable and accrued liabilities | $ 959 | $ 5,949 | $ 1,099 | |
| Seller-financing to purchaser | $ - 0 | $ - 0 | $ 2,000 | |
| Questions: | ||||
| 1. what information could an investor get from SCF? | ||||
| 2. Why are depreciation and amortization expensed added back to net income to compute Operating Cash flow? | ||||
| 3. What is the advantage and risk of having lower balance of cash? the same for higher balance of cash? | ||||
| 4. Choice Hotels had signicant fluctuation in "Cash Used in Investing Activities" over the years. Why? | ||||
| 5. What are the risks faced by Choice hotels and its industry as they relate to the current Covid-19 crisis worldwide? Be specifc in relation to CFs |
Ratio Analysis
| Solvency Ratios | Suggested level for a good result | ||||||||||
| 1 | Ability to Current Liabilities: Current Ratio | ||||||||||
| a. Calculate Current Ratio | |||||||||||
| 2019 | 2018 | ||||||||||
| Current Assets | |||||||||||
| Current Liabilities | |||||||||||
| b. Calculate Current Ratio | Above 0.42 | ||||||||||
| Leverage Ratios | |||||||||||
| 2 | Debt Ratio | 2019 | |||||||||
| Total Debt | |||||||||||
| Total Assets | |||||||||||
| c. Calculate Debt Ratio | Around .09 | ||||||||||
| Profitability Ratios | |||||||||||
| 3 | Net Profit Margin | 2019 | 2018 | ||||||||
| Net Income | |||||||||||
| Total Revenues | |||||||||||
| Calculate Net Profit Margin | Above 8% | ||||||||||
| 4 | Basic Earning Power (BEP) | 2019 | 2018 | ||||||||
| EBIT | |||||||||||
| Total Assets | |||||||||||
| Calculate BEP | Above 12% | ||||||||||
| Asset Management Ratios | |||||||||||
| 5 | Evaluating Receivables: Days Sales Outstanding | ||||||||||
| a. Calculate Average Daily Sales | |||||||||||
| 2019 | 2018 | ||||||||||
| Receivables (net ……) | |||||||||||
| Total Revenues | |||||||||||
| 365 days | |||||||||||
| Average Sales per day | |||||||||||
| b. Calculate Days Sales Outstanding | 50 days or less | ||||||||||
| 6 | Explain the significance of your ratio calculations. |
Answer:
Instructions 1. Please enter the data from the previous tabs by clicking on the cell and typing = and then clicking on the desired cell. For example to enter Net Income for 2018 type = and go to the income statement tab and click on cell I27. 2. Complete the calculations. 3. Explain the significance of your ratio calculations.
