Acc 205

A Comprehensive Financial Statement Analysis on (Company Name).

Nathan T. Thomas

ACC 205 Principals of Accounting

Instructor Name

Date

Introduction

The information from Financial statements is used widely by both external and internal users, including investors, creditors, managers, and executives. These users must analyze the information in order to make business decisions and making right decision about the investment opportunities in a company, so understanding financial statements is of great importance. Several methods of performing financial statement analysis exist. This paper is primarily aimed to provide a detailed analysis of the financial statements of Google Inc., selected as a publicly traded company in United States.

First of all a short discussion about the company’s history, its products and services, its industry and competitors is provided in the section named ‘Company Overview’. In the next section, the comprehensive three year income statement and balance sheet analysis is presented. The meaning and importance of horizontal analysis and a visual presentation of the horizontal analysis using the items of income statement and balance sheet of the company as Google Inc. is detailed.

As the ratio analysis is a fundamental necessity of evaluation a firm’s financial and operational soundness and overall performance, the successive section is dealt with ratio analysis of the company. The meaning of the ratios used for analysis and the implications of the results found is enclosed with this section. Finally an effective and meaningful recommendation about the company’s performance and its investment opportunities is provided to all individual and institutional investors.

Company Overview

Google Inc. is a technology company which builds products and provides services in order to organize the information and make it universally accessible and useful by the ultimate users. Google Inc. was founded in 1998 and is headquartered in Mountain View, California, United States. With its 44,777 full time employees the firm is conducting its business in the technology sector and belongs to the Internet Information Providers industry in United States. It provides a ‘Search service’ that delivers so many relevant search results in response to the user queries;‘Product Listing Ads’ that offer product information for customers; Search plus Your World; Google Now, a predictive search feature; and Google Knowledge Graph, which enhances Search service. The company also offers Ad-Words, an auction-based advertising program; AdSense, a program which enables Websites that are part of the Google Network to deliver ads; Google Display, a display advertising network; DoubleClick Ad Exchange, a marketplace for the trading display ad space; and YouTube that provides video, interactive, and other ad formats. In addition, it provides Google Mobile that extends its products and services to mobile device users; Google Local, which provides local information; Android, an open source mobile software platform; Google Chrome OS, an open source operating system; Google Chrome, a Web browser; Google+ for sharing various things online with different people; Google Play, a cloud-based digital entertainment destination; Google Drive, a place for users to create, share, collaborate, and keep their stuff; and Google Wallet, a virtual wallet for in-store contactless payments.

Further, the company offers Google TV, a platform for consumers to use television and the Internet on a single screen; Google Apps, a cloud computing suite of message and collaboration tools; Search Appliance, a search technology for use within enterprises; Google Site Search, a custom search engine; Google Commerce Search for online retail enterprises; Google Maps Application Programming Interface; and Google Earth Enterprise, a software solution for imagery and data visualization. Additionally, it offers mobile wireless devices, and related products and services. Its major competitors in the same industry are the Yahoo! Inc., the Facebook Inc., MSN, AOL Inc., Disney Online, Move Inc., Match.com LLC, SINA Corporation, Daum Communications Corporation.

Horizontal Analysis

Horizontal analysis is a fundamental procedure of comparing ratios or line items in a company’s financial statements over a certain period of time and based on which an analyst or investor can gather knowledge about the financial health of the selected company and can make a crucial decision whether to invest in it or not. One method of performing a horizontal financial statement analysis compares the absolute dollar amounts of certain items over a period of time. The other method of performing horizontal financial statement analysis compares the percentage difference in certain items over a period of time. The dollar amount of the change is converted to a percentage change. A three-year horizontal analysis (2010, 2011and 2012) of the income statement of Google Inc. presented in the table below:

Period Ending	31-Dec-10	31-Dec-11	Change	31-Dec-12	Change
Total Revenue	29,321,000	37,905,000	29%	50,175,000	32%
Cost of Revenue	10,417,000	13,188,000	27%	20,634,000	56%
Gross Profit	18,904,000	24,717,000	31%	29,541,000	20%
Research Development	3,762,000	5,162,000	37%	6,793,000	32%
Selling General and Admin	4,761,000	7,813,000	64%	9,988,000	28%
Total Operating Expenses	8,523,000	12,975,000	52%	16,781,000	29%
Operating Income or Loss	10,381,000	11,742,000	13%	12,760,000	9%
Other Income/Expenses Net	415,000	584,000	41%	626,000	7%
EBIT	10,796,000	12,326,000	14%	13,386,000	9%
Income Tax Expense	2,291,000	2,589,000	13%	2,598,000	0%
Net Income From Cont. Ops	8,505,000	9,737,000	14%	10,788,000	11%
Net Income	8,505,000	9,737,000	14%	10,737,000	10%

In the year 2011, total revenue increased by 29%, gross profit increased by 31%, EBIT (earnings before interest and tax) increased by 14% and net income increased by 14% than that of the year 2010. The company performed very well during the year 2011.In the year 2012, total revenue increased by 32%, gross profit increased by 20%, EBIT (earnings before interest and tax) increased by 9% and net income increased by 10% than that of the year 2011. The company performed well during the years 2011 and 2012. From the respective balance sheet of the company of 2010, 2011 and 2012, here the horizontal analysis is conducted as the percentage change in the asset and liability items for the period 2010 to 2011 and 2011 to 2012 in the following table:

Period Ending	31-Dec-10	31-Dec-11	Change	31-Dec-12	Change
Cash And Cash Equivalents	13,630,000	9,983,000	-27%	14,778,000	48%
Short Term Investments	21,345,000	34,643,000	62%	33,310,000	-4%
Net Receivables	5,261,000	6,387,000	21%	9,729,000	52%
Inventory	0	35,000		505,000	1343%
Other Current Assets	1,326,000	1,710,000	29%	2,132,000	25%
Total Current Assets	41,562,000	52,758,000	27%	60,454,000	15%
Long Term Investments	523,000	790,000	51%	1,469,000	86%
Property Plant & Equipment	7,759,000	9,603,000	24%	11,854,000	23%
Goodwill	6,256,000	7,346,000	17%	10,537,000	43%
Intangible Assets	1,044,000	1,578,000	51%	7,473,000	374%
Other Assets	442,000	499,000	13%	2,011,000	303%
Deferred Long Term Asset	265,000	0	-100%	0
Total Assets	57,851,000	72,574,000	25%	93,798,000	29%
Accounts Payable	6,137,000	7,148,000	16%	10,893,000	52%
Current Portion of LTD	3,465,000	1,218,000	-65%	2,549,000	109%
Other Current Liabilities	394,000	547,000	39%	895,000	64%
Total Current Liabilities	9,996,000	8,913,000	-11%	14,337,000	61%
Long Term Debt	0	2,986,000		2,988,000	0%
Other Liabilities	1,579,000	2,199,000	39%	2,786,000	27%
Deferred LT-Liabilities	35,000	331,000	846%	1,972,000	496%
Total Liabilities	11,610,000	14,429,000	24%	22,083,000	53%
Common Stock	18,235,000	20,264,000	11%	22,835,000	13%
Retained Earnings	27,868,000	37,605,000	35%	48,342,000	29%
Other Stockholder Equity	138,000	276,000	100%	538,000	95%
Total Stockholder Equity	46,241,000	58,145,000	26%	71,715,000	23%

From year 2010 to 2011, here the horizontal analysis shows that the current assets of the company increased by 27% but as the long term assets decreased thus the increase in the total assets of the company is 25%. The company’s long term liabilities increasedand thus total liabilities increased by 24% and the current liabilities decreased by almost 11%. TotalStockholders’ equity of the companyincreased drastically by 26% in 2011.During the period from year 2011 to 2012, the current assets of the company increased by 15% and total assets increased by29%. The company’s current liabilities raised highly by almost 61% and the total liabilities increased by almost 53%. Total Stockholders’ equity of the company increased drastically by 23% in 2012.

Ratio Analysis

In this section the current ratio, quick ratio and cash to current liabilities ratio over a two-year period of 2011 and 2012 is analyzed. The current ratio is a measure of the ability of a firm to meet its short-term obligations. In general, a ratio of 2 to 3 is usually considered good. Too small a ratio indicates that there is some potential difficulty in covering obligations. A high ratio may indicate that the firm has too many assets tied up in current assets and is not making efficient use to them. The quick ratio is a more stringent measure of liquidity. Only liquid assets are taken into account. Inventory and other assets are excluded, as they may be difficult to dispose of. The cash to current liabilities ratio reveals how much cash and cash equivalents assets the company has on hand to pay off its current obligations. Poor receivables or inventory-turnover limits can dilute the information provided by the current and quick ratios. This ratio provides a better indicator of a company's ability to pay its short-term liabilities with the cash it produces from current operations. The following table shows the results of the ratios for Google Inc. for the year 2011 and 2012:

Ratios	2011	2012
Current ratio	5.9	4.2
Quick Ratio	5.7	4.0
Cash to Current Liabilities	1.1	1.0

The ratios of the company in 2011 were very impressive although there is a decreasing trend in all the ratios in 2012 than that of the year 2011. In the following graph it is shown that the current ratio and quick ratio decreased highly in 2012.

Here is a comparison of the company’s current ratio and quick ratio for the year 2012:

Ratios- 2012	Company	Industry
Quick Ratio	4.0	3.7
Current Ratio	4.2	4

The company’s current ratio and quick ratio is very high due to the high level of inventory in 2012 and although the short term investment was low, the net receivables in 2012 was huge than that of in 2011. However, the company is performing better in compared to its competitors in the same industry.

Recommendation

Based on the above ratio analysis and horizontal analysis here it is clear that the company is performing very well in its business environment. But the business environment in its industry is getting more complicated and competitive as well. So, the high use of long term debt is not very much expectable as it would increase the financial risk of the firm. Also the proper management of its current and long term assets must be given more concentration by the respective authority of the company. However, I would recommend an individual to invest in this company because of its highly impressive performance and consistent soundness of financial health.

References

Larry Walther. (2012). Principles of Accounting: Volume I. San Diego, CA: Bridgepoint Education, Inc

Reilly, Frank K. & Brown, Keith C . (2009-2010). Investment Analysis and Portfolio Management (8th edition).Thomson, Southwestern.

Google Inc. Financial, retrieved on 30th September, 2013 from

http://finance.yahoo.com/q?s=GOOG

Google Investors Relations, retrieved on 30th September, 2013 from

http://investor.google.com/

Elaine Henry, CFA , Thomas R. Robinson, CFA and Han Hendrik van Greuning, CFA (2012). Financial Reporting Analysis. Volume 3 Reading 27. New York: CFA institute.

Edgar A. Norton, CFA, Kenneth L. Parkinson and Han Pamela Peterson Drake, CFA (2012). Corporate Finance and Portfolio Management, Volume 4, Reading 40. New York: CFA institute.