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DISCUSSION BOARD #3: BEFORE & AFTER REFORMULATION OF FINANCIAL
STATEMENTS
Discussion Board #3: Before & After reformulation of financial statements.
Javier E. Caycedo Medina
School of Business, Liberty University Online
Author Note
Javier E. Caycedo Medina
I have no known conflict of interest to disclose.
Correspondence concerning this article should be addressed to Javier E. Caycedo Medina
Email: kcaycedo@liberty.edu
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DISCUSSION BOARD #3: BEFORE & AFTER REFORMULATION OF FINANCIAL
STATEMENTS
Discussion Board #2: Before & After reformulation of financial statements.
Every public company is required to submit, along with other reports and documentation,
the four main financial statements: Income statement, balance sheet, statement of cash flows, and
statement of shareholders’ equity. For this report, Chipotle Mexican Grill, Inc.’s (CMG) GAAP-
compliant financial statements will be compared with their reformulated version. The intention
of this report is to portray and highlight the main differences of GAAP and reformulated
financial statements, as well as to evaluate CMG’s financial statements by comparing the
company to itself.
Income Statement
CMG’s GAAP-compliant and reformulated income statement shows slight differences in
the net income. This is due to the fact that the company was not required to account for any extra
loss or gain in the company’s operation before and after taxation, as well as any adjustments in
foreign currency translation. Once added, CMG’s total earnings for the year will be different
(See chart 1). The reformulated statement, instead of a net income, will show a comprehensive
income that accounts for the actual amount of total earnings the company made during the years.
According to Mark Maurer, a writer for the Wall Street Journal, “Companies’ reliance on
disclosing adjusted earnings or other figures not consistent with generally accepted accounting
principles has made it more difficult for investors to forecast performance” (2019). It is very
important that investors always look at both net income and comprehensive income before
investing in a company. Sometimes, the difference between the two results could be large.
Chart 1
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DISCUSSION BOARD #3: BEFORE & AFTER REFORMULATION OF FINANCIAL
STATEMENTS
Balance Sheet
The GAAP-compliant balance sheet will show the total amount of assets, typically
divided in current assets, and long-term assets. On the other hand, the reformulated balance sheet
will show the total value of operating items the company possess. It is expected for the total
amount of assets to be larger than the total amount of net operating assets (NOA). However, it is
common to see that current and operating assets are close to each other. Something that needs to
be highlighted is that to calculate the NOA it is required to calculate the amount of working cash,
and not the total cash and cash equivalents. According to this report’s calculations, CMG’s
operating assets are around 72% of the total assets. This means that there is an average 28% of
assets the company owns, and that do not contribute to the company’s operations; therefore not
generating income. However, in the past year, CMG has managed to increase their operating
assets significantly (see chart 2). According to an article from the Wall Street journal, Apple Inc.
had enough cash, securities and accounts receivables to keep the company’s operations going for
this year, accounting for a global pandemic, even if they did not cut in costs or sold a phone
(Francis & Gryta, 2020). Having enough operating assets to run a company, especially during
difficult times, is an important strategy company’s should follow.
Chart 2
Statement of Cash Flows
In this statement is where we can find the major differences between the GAAP and
reformulated statements. While a GAAP-compliant is looking for a cash reconciliation between
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DISCUSSION BOARD #3: BEFORE & AFTER REFORMULATION OF FINANCIAL
STATEMENTS
the amount of cash the company started the year, and the amount of cash left after a year of
operations, the reformulated statement of cash flows is mainly looking the free cash flow from
the operating activities of the company. It is important to mention that the total amount earnings
reported not always signifies the total amount of real money the company owns. We can see how
much real money (cash) a company actually made when we reformulate the statement of cash
flow, and calculate the free cash flow. According to the Deloitte journal, reformulating this
statement to a direct method, instead of an indirect (GAAP-compliant) method, could actually
forecast liquidity in the company, and potentially attract more investors (Jackson, 2020). For
CMG, their free cash flow historically actually shows a positive number, instead of a decrease or
a negative number like in 2015 and 2016 (See chart 3). This means that even in the food safety
crisis in 2016, where the company actually had a decrease in cash, CMG was still able to
generate a free cash flow. This will definitely attract investors, by seeing how CMG is able to
manage risk and have a positive outcome.
Chart 3
Statement of Shareholders’ Equity
In this statement, the companies will show how much as issued and earned form common
stock, preferred stock, and how it affects the retained earnings of a company. In the comparison
with the GAAP and reformulated statement of shareholders’ equity, CMG has a slight difference
in both results for total common shareholder equity, because CMG only uses common stock (see
chart 4). Once calculating the comprehensive income, the company will have a better
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DISCUSSION BOARD #3: BEFORE & AFTER REFORMULATION OF FINANCIAL
STATEMENTS
understanding of their retained earnings. This is why investors should look at both versions of
this statement before making a decision, to make sure the company is actually being able to
generate earnings while also affording capital investments.
Chart 4
Conclusion & Biblical Integration
Overall, even though CMG has had difficulties in the past years, that has led the company
to many financial challenges, the company has been able to remain strong and build a trustable
name for their brand. Reformulating, evaluating and comparing CMG’s financial statements
shows the strong market value the company holds, and their ability to generate not only earnings
and equity, but also cash and assets. No matter the difficulties, CMG has always sow bountifully
in what they believe, and in their company, and this is why they reap bountifully as well (2
Corinthians 9:6-7) This is a biblical principle that all companies should practice if they want to
be as successful as CMG.
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DISCUSSION BOARD #3: BEFORE & AFTER REFORMULATION OF FINANCIAL
STATEMENTS
References
English Standard Version. (2001). English Standard Version Bible Online.
https://www.esv.org/2+Corinthians+9/
Francis, T., & Gryta, T. (2020, March 25). Coronavirus shows cash is King, even for biggest U.S.
companies. WSJ. https://www.wsj.com/articles/coronavirus-puts-a-premium-on-cash-
even-for-biggest-u-s-companies-11585153040
Jackson, A. (2020, January 14). How direct cash-flow models help predict liquidity.
https://deloitte.wsj.com/cfo/2020/01/14/how-direct-cash-flow-models-help-predict-
liquidity/
Maurer, M. (2019, October 18). Companies’ Non-GAAP adjustments to net income have soared.
WSJ. https://www.wsj.com/articles/companies-non-gaap-adjustments-to-net-income-
have-soared-11571429258
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