Response to Classmates Discussions
kingstonman41
Week6Discussion2ClassmatesResponse.docxWeek 6 Classmate Discussion 1 Response
Guided Response: Respond to at least two of your fellow students’ or instructor posts in a substantive manner and provide information or concepts that they may not have considered. Each response should have a minimum of 100 words and be respectful of others’ opinions and beliefs that differ from your own. Support your position by using information from the week’s readings. You are encouraged to post your required replies earlier in the week to promote more meaningful and interactive discourse in this discussion forum. Continue to monitor the discussion forum until Day 7 and respond with robust dialogue to anyone who replies to your initial post.
Below are two of my classmate with the week 6 of their discussion that I need response to their name are Jamie Choate and Lisa Schreiner
Jamie Choate
TuesdayJun 23 at 11:16am
Common-size financial statements display line items as a percentage of one selected item (Fuhrmann, 2020). Creating common-size financial statements makes it easier to analyze a company over time and compare them to their competitors using a vertical analysis. The percentages make it easier to spot trends more quickly and items that may have went undiscovered if just looking at the raw financial statement. Common-size statements can be created for the balance sheet, income statement, and statement of cash flow.
The common-size financial statements are below for both Build-A-Bear Workshop and Mattel. While this is not an exact comparison since there are no companies that have direct competition with Build-A-Bear, I selected a toy manufacturer for this analysis discussion.
Build-A-Bear shows a decrease in current assets on its common-size balance sheet from the last two years. Cash has remained constant but inventory has almost been cut in half, dropping from 34% to 18%, which is the main driver of this change. This change could indicate that over the last year, they have sold more inventory. In comparison to Mattel, Build-A-Bear has about 10% less cash available. Mattel has maintained constant on all current assets over the last two year period. The main differences are that Mattel maintains about ½ the inventory and a larger percentage of receivables. Mattel appears to manage inventory somewhat better, however Build-A-Bear may be better at collecting what is owed from their customers.
When analyzing the income statement, Build-A-Bear has maintained a consistent gross profit margin for the last couple of years. In addition, net sales are consistent as well as cost of goods sold. While net income has increased over the last year, it is still very low with only a 5% change. The profit margin ration tells us that management has been consistent on controlling costs, however the sales are not strong enough to produce the results needed to sustain business but are moving in the right direction. They are also aligned with their competitor, Mattel. Both show very low profit margins but appear to control costs. The biggest difference I see on the income statement is the cost of administrative expenses. In this area, Mattel is about 14% lower, however this is balanced out by an overall increase in cost of goods sold.
When analyzing the cash flow statement, Build-A-Bear shows the biggest change in financing activities over the last couple of years. Build-A-Bear does not appear to be issuing or repaying any debt during the last period. When compared to Mattel, this is just the opposite. Mattel appears to be borrowing large amounts of debt to operate. They also appear to be purchasing more new equipment than Build-A-Bear which may be what is driving up the amount of debt.
The analysis of these statements tell me that both companies are maintaining consistent operations. They are both struggling in the current economy which indicates a trend for the industry. While not losing liquidity, they are not gaining either. Costs are staying consistent but sales are not increasing. Mattel appears to be financing more operations but this could be due to refinancing based on lower interest rates or the need to purchase more equipment or update to sustain operations. Both companies are showing poor performance and would not be a good investment at this time.
References
Build A Bear Workshop. (2020). Financial Reports. Retrieved from https://buildabear.gcs-web.com/financial-information/annual-reports (Links to an external site.)
Fuhrmann, R. (June 1, 2020). The Common Size Analysis of Financial Statements. Retrieved from https://www.investopedia.com/articles/investing/111413/commonsize-analysis-financial-statements.asp
Mattel. (2020). 2019 Annual Report. Retrieved from https://www.investopedia.com/articles/investing/111413/commonsize-analysis-financial-statements.asp
Porter, G., & Norton, C. (2018). Using financial accounting information: The alternative to debits and credits (10th ed.). Retrieved from https://www.cengage.com
Lisa Schreiner
SaturdayJun 20 at 9:27am
Common size financial statements present each line item as a percentage of a common total, reflecting the weighted value of impact the dollars have on results (Porter & Norton, 2018). This format provides analysts the ability to compare two or more companies over various periods differing in size or country, reduces bias, and reveals changes in value over time, easing identification requiring further scrutiny (Hayes, 2020). For example, the common size income statement reflects percentages of each line relative to revenue. If net income is 25% and cost of goods sold is 50%, we can derive operating expenses and taxes equal 25%. If the organization would like to increase net income, reviewing these percentages indicates a detail look at the components of cost of goods sold may pinpoint an item to reduce this expense.
The common size financial statements for Starbucks can be found in Tables 1-3 below and those for McDonalds can be found in Tables 4-6.
The operating income of Starbucks for 2019 is 15%, down from 16% in 2018 (see Table 1). The 2019 figure reveals for each $1 of revenue, the organization recognized $0.15 as income from operations. Further review reflects cost of goods sold is 32% of revenue, whereas all operating expenses to run the stores are 40% of revenue, indicating COGS is a significant expense to the organization (see Table 1). McDonalds operating income for 2019 is 43% of revenue or for each $1 of revenue, the company recognizes $0.43 in operating income (see Table 4). This is a significant increase over Starbucks operating income, indicating McDonalds minimizes COGS and operating expenses with efficiency.
Starbucks reflects long term debt at 58% of total liabilities and stockholders equity in 2019, a 20% increase over 2018 where long term debt was 38% of total liabilities and stockholders equity (see Table 2). Since total liabilities are 132% of total liabilities and stockholders equity, equity is in a negative position indicating Starbucks cannot cover its debt if called and the company is insolvent (see Table 2). McDonalds 2019 long term debt is 72% and total liabilities are 117% of total liabilities and stockholders equity (see Table 5). Although McDonalds reflects liabilities higher than total liabilities and equity combined, retained earnings reflects consistent net income or the ability to cover debt through profit from operations.
The cash flow statement reflects net cash provided by operating activity as 19% in 2019 and 48% in 2018 for Starbucks (see Table 3). Stored value card balances (gift cards) from 2018 represent the largest change year over year impacting these results. The significant decrease is net cash provided by operations is a clear indication Starbucks is struggling to gain traction and grow. McDonalds provides 39% of operating activity to net cash due to its low operating expenses (see Table 6). The higher percentage of net cash inflow allows McDonalds to invest in equipment or talent to further grow the business.
References
Hayes, A. (2020, Apr 24). Common Size Financial Statement Definition. https://www.investopedia.com/terms/c/commonsizefinancialstatement.asp (Links to an external site.)
Porter, G., & Norton, C. (2018). Using financial accounting information: The alternative to debits and credits (10th ed.). https://www.cengage.com (Links to an external site.)
U.S. Securities and Exchange Commission. (n.d.). EDGAR company filings. https://www.sec.gov/edgar/searchedgar/companysearch.html
