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FINANCIAL STATEMENT ANALYSIS ASSIGNMENT ACTG 201: RUSS

SPRING 2013

Due May 8, 2013 Project Overview Your assignment is to select a domestic corporation that is predominantly in a retail industry whose stock is publicly traded and pretend that you are a financial analyst scoping out a potential investment. You should focus on the general financial health of the company and pretend you are doing a very simple initial analysis of the company. A domestic corporation is one that is based in the United States. I want you to use a U.S. company because they will be applying U.S. GAAP (generally accepted accounting principles) to their financial statements. These are the accounting rules you are learning this semester. Foreign accounting rules may differ from U.S. GAAP, complicating your task. Foreign companies that are trading on US stock exchanges have converted to US GAAP, but the conversion is not 100% transparent for inexperienced financial statement users. Therefore, make sure your company is based in the U.S. I want all students to choose a retailer to promote comparability in classroom discussions of your financial analysis project. A retailer is a company that purchases merchandise to resell to consumers. You may choose a company that manufactures its product as long as reselling is a major part of its business operations. Companies are categorized according to four-digit SIC (Standard Industry Classification) codes. The main retailing SIC codes start with 59 as the first two digits. Check your company’s  description  or  its  SIC  code  to   make sure it is a retailer. A publicly traded company is one whose stock is traded on an organized exchange (NYSE, AMEX, etc.). A broad spectrum of shareholders own the company. Publicly traded companies are regulated by the Securities and Exchange Commission (SEC) to protect the investing public. The SEC requires these companies to follow explicit accounting rules and to provide information to the public. That is why you are able to obtain an audited annual report, free of charge, from the company you choose. Keep in mind that just  because  you  are  able  to  obtain  an  annual  report  doesn’t  mean  the company is publicly traded. Annual Report You should obtain an annual report by March 11th. The annual report of your publicly traded  company  must  include  the  basic  financial  statements  and  the  auditor’s  opinion.   You can request that a hard copy of an annual report(s) be mailed to you. However, you need to allow ample time for processing and mailing the report. Otherwise, you could obtain an electronic copy via the Intenet. If you use an electronic annual report you must

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print out at least the basic financial statements. Note that financial information offerred by  Yahoo!  Finance,  Hoover’s,  and  other  financial  sites  is  NOT  an  alternative for an annual report. You will be penalized 10 points for not following instructions if you do not submit an annual report, or at least the audited financial statements from an electronic annual report, with your analysis at the end of the semester. It is entirely up to you how you select your corporation. You must notify me of your selection, via the Company Choice form, by March 18th. The choice is collected as a regular homework assignment. Here are some suggestions for choosing a company.    If  you  don’t  really  care  what   company  you  choose,  one  easy  thing  to  do  is  go  to  the  Wall  Street  Journal’s  Annual   Report Service. All companies within this service are publicly traded. You can order hard copy annual reports online at http://wsj.ar.wilink.com/asp/WSJ1_search_ENG.asp. It would be a good idea to request several so that you will have a backup in case of problems and for other companies to use for comparison purposes. Search by industry sector or alphabetically. Alternatively, you can search general business reference manuals online or in the library for possible companies. You can go to the business section in the library's reference area or ask a reference librarian for help. There are several references that provide general information for specific companies. Try, for example, Hoover's Handbook (HG4057.A288)  or  Standard  &  Poor's  Registry  (HG4057.A4).  Hoover’s  is  also  available   online at http://www.hoovers.com. You can browse the company directory, specifying public companies only. You can also browse by SIC code and limit your search to retailers only. The main retailing SIC code is 59. My  favorite  way  to  find  a  company’s  financial  information is to use Google Finance at http://finance.google.com/finance. It is very easy to search for a company using its ticker symbol (Google helps you determine the ticker symbol). Scroll  down  to  “Facts”  and   under  “Links”  there  is  usually  a  link  to  the  company’s  Investor  Relations.  Once  at  that   site there is usually an option for Annual Reports. Make sure you do not settle for “Selected  Financial  Information.”  The Management Discussion and Analysis and Notes to the Financial Statements will be just as valuable as the financial statements when you interpret  the  ratios  you’ve  calculated. Comparison Google Finance is a wonderful tool for obtaining financial information about a company you would like to compare to yours. Scroll  down  to  “Related  Companies”  for  access  to   their information. Although you cannot use the ratios provided by Google for your company, you are allowed to use the provided ratios for a comparison company. In addition, you can obtain industry  ratios  by  clicking  “More  ratios  from  Reuters”  under   “Facts.”

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Analysis On May 8th, you must submit a written financial statement analysis. It will be reviewed by me and it will be graded according to the syllabus. Late projects will not be accepted. Ratio analysis will be the core of your analysis. Use the key relationships identified in your textbook as a guide. Choose five ratios that you think are the most useful for analyzing your particular company, making sure to address liquidity, solvency, and profitability. After calculating the ratios, you must interpret them. Just use common sense and tell me what you think of this initial information. Remember to use the notes to the financial statements and any narrative provided by management. You must compare  the  company’s  ratios  to  industry  averages  or  to  a  similar  company’s  ratios.     REQUIREMENTS I expect a two page, maximum, typewritten report that is double-spaced. Brevity is crucial in the business world. Decide what is important to say and leave out the rest. Add a third page schedule that clearly explains the computations of your five ratios and can be traced to the annual report. Start with a very brief introduction telling me the name of your company, the fiscal year end of your annual report, and why you chose the company. One or two sentences are plenty. Make sure you explain how you know your company is a retailer. Then discuss each of the five ratios that  you  chose  for  your  company’s  analysis.    Do  not   regurgitate the textbook definition of the ratio, but describe what the ratio means to you given your studies and comparisons. Leave the construction of the ratio in the third page schedule and focus on the interpretation. For example,

“Company  A  has  a  Current  Ratio  of  2.0.    This indicates a healthy liquidity position because it has twice as many current assets to pay current liabilities as they come due. A ratio of 2.0 is a standard benchmark for liquidity.    In  addition,  Company  A’s  ratio  of  2.0  is  greater  than  that  of  its   primary  competitor,  Company  B,  whose  ratio  is  1.2.”

Last, grade the company's financial health (A, B, C, D, or F) and support your grade with a one paragraph summary. Remember, you have to convince me that your evaluation is reasonable. You will be graded on the content of the analysis, your analytical skills, and your ability to communicate effectively.