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Transcript of Accounting 1A - Final Projectcabrillo.edu/~mbooth/acct1a/Final Project 2016/Final Project...
Accounting 1A - Final Project
I. Annual Report Case Study Overview
A. To complete this assignment you will need to use the annual reports of
your two companies; i.e. the Primary and Secondary from the pairing of
companies you selected.
B. Work in assigned study groups. The team will submit one project in
addition you will turn in your own analysis for the summary. See the Grading
section below.
C. The Final project is a narrative analysis, not a question and answer.
There are specific summary tables, and final PowerPoint presentation.
II. The case study analysis is intended to be reflective of the learning from each
Chapter of Libby, the Case studies for American Eagle/Urban Outfitters. The team within
the guidelines of these instructions construct a format for the project that will present the
analysis and application of information in the most effective manner. The instructions
provided, include a series of templates Annual Report Case Study Analysis Template,
this will assist in guiding the process. In addition, provided is an example of how to
approach the case study, do not dwell on the format, and focus on the content and
analysis.
III. You are expected to write narratives about each section. It is not acceptable to copy text directly from the annual reports in to the Annual Report Case Study Template. You are expected to write the narratives. In addition, you must provide citations. Excellent resources for citations: Avoiding Plagiarism: Quotes & Paraphrase or available
through the reference desk at the Cabrillo Library The MLA Handbook for Writers of Research Papers. Plagiarism will not be tolerated. Do your own work as a team and as an individual. The purpose of the project is to demonstrate what you have learned, not to mimic Wall Street Financial Analysts. From the Cabrillo Catalog, “Students are expected to know how to credit sources, how to quote and paraphrase, and how to avoid plagiarizing the work of others. If you are unsure, ask your instructor for assistance before you submit your work for credit.”
IV. Grading: You are graded based on the Grading Rubric provided, plus the
Student Peer Evaluation will be used to prorate total project score for each individual
team member.
A. Total of 160 points for the project: 1. Company Analysis: (20 points, team effort)
2. Final Project Journal: (90 points, team effort)
a) See Journal Section of Project instructions for content
requirements
(1) Chapter “take away”
(2) Chapter “Case Studies”
(3) Market Analysis
(4) Ratio Analysis
3. Final Project Summary with Presentation: (50 points, team effort)
4. Team/Individual Peer Review (team review of individual effort)
a) See the Peer Evaluation Rubric for the breakdown of the
scoring by each team member.
b) Total team points per individual will be scored by prorating
the weighted score for each student from the team.
V. Locating Information in the Annual Report:
A. See Video on Canvas: “How to find 10k and Industry Ratios video;
Corporate Annual Reports” found on Cabrillo Canvas modules, Final Project.
B. Annual reports can be located by going to: https://www.google.com/finance
C. The company annual report should be from the most current year-end
report. You will have to deal with some terminology that you are not familiar with
able be forced to make decisions about what is and what is not relevant. Use
your text book and the Weiner Study Guide.
D. The term "current" year refers to the most recent year for which the annual
report was prepared. (note: the annual reports must be from the same fiscal years or
calendar year)
E. Note that terminology and formats used in "real world" annual reports
probably will deviate somewhat from the textbook. This does not mean that our
textbook is wrong, only that there is a wide variety of acceptable terminology and
formats (within limits of GAAP) that are used in practice.
F. Note; that financial statements are "consolidated," which means that
accounts are often shown combined together, so you will not see a separate line
item for each and every account. Combining accounts or condensing the
information enhances understandability by removing excessive details
concerning items that are not material enough to be shown separately.
Sometimes, further detail concerning an item in the financial statements can be
found in the notes that follow the financial statements.
G. In a few instances, an item may not be disclosed. In that case, simply
indicate in the appropriate blank that the item is not disclosed. Be careful to make
sure that the analysis is not overlooking something! Information may be disclosed
in the financial statements, significant accounting policies, other notes, or in other
parts of the annual report.
H. When you have questions
1. Discuss the question with your other team members and, if you
cannot reach a consensus, then ask your professor for help!!
a) I am always available as a resource
VI. Final Project DESCRIPTION AND OBJECTIVES
A. An annual report communicates a wide variety of information about a
corporation, both financial and nonfinancial, to those who use financial statements.
In this case, you will analyze the actual annual report of a "real world" company.
B. Specifically, the final project analysis asks you to:
1. Answer general "theory" questions regarding annual report items
2. Locate and report information in your company's annual report
3. Perform calculations and analyses on your company's financial
statement data
4. Evaluate the results from your calculations and analyses and form
conclusions regarding your company compared, to prior reporting periods
(trend analysis), the competitor and the industry.
C. This case analysis has many important learning objectives and purposes,
including:
1. Comprehensive review of important concepts covered in this course
(which is an excellent starting point in reviewing for each of the chapter
assessments), as well as integrating the knowledge you have gained
during the semester so that you can see the "big picture,"
2. Applying an experience "hands on" knowledge using an actual
corporate annual report
3. Improve ability to locate, obtain, and organize information contained
in an annual report
4. Exposure to alternative formats for financial statements and
disclosures as well as terminology that may not be "just like" the textbook
5. Develop communication skills (i.e., effective reading, listening,
writing, speaking)
6. Improve/reinforce interpersonal skills by providing experience in
working with other students as a cooperative learning team
7. Provide a foundation in understanding and using corporate annual
reports so useful in future college courses and professional career, as well
as from a potential investor standpoint.
VII. Company Analysis (20 Points)
A. Note: the Company Analysis is required for the Primary and Secondary
Corporation. Before the project can begin, it is important to know the background
of each corporation. The comparison, will be critical to understanding the content
of the Annual Report 10K
B. Select one of the companies as your "primary" and the other “secondary”
or as the "competitor".
a) Type of business (retailing, computer hardware/software,
health care, etc.)
Why did you select these companies?
C. Provide the following information for your primary company:
a) Give a brief history of the primary company and secondary
company
b) What is your company’s business i.e. what does your
company do to earn revenues. Specific Industry and Sector (this
will be found on the Final Project Corporate Listing, with the paired
corporations.
c) Using management discussion and analysis section in the
annual report (Typically, and for most of the companies on the list
this MD & A will be available in the annual report prepared by the
top officers of a corporation to address the stockholders and
creditors regarding the performance and prospects for the
company.
d) Summarize valid information it contains regarding the current
year’s performance; provide cited examples.
e) Summarize what management regarding the future goals,
prospects and strategy for the company. Provide several cited
examples.
f) What are the names of the top officers, with 2- 3 sentence
biography of previous jobs and education? (Limit to key officers)?
This is significant, specifically because of past experience, and how
this impacts the strategy of the corporation.
(1) President/CEO
(2) CFO, Chief Financial Officer
(3) Various Vice Presidents
g) What is stated about the composition of the Board of
Directors?
(1) Provide names and one line biography of each board
member (this should be a citation from the annual report or
corporate website.)
(2) Understand the impact of the board, with regard to
risk management, strategic direction, audit, and corporate
governance.
(3) What is the role of each committee, and how does the
board participate?
h) Provide summary of corporate governance, risk
management, audit compliance, corporate ethical standards of
conduct, etc.
(1) Does the corporation have an audit committee? Does
it have an internal audit department?
(2) Can you find any information dealing with internal
control?
2. Qualified or unqualified report?
a) Who are the external auditors? Are they the same auditors
for your competitor company? Is there any specific task they are
providing beyond audit compliance?
VIII. Final Project JOURNAL (90 points)
A. Note: The Journal portion of the project “is not” a fill in the blank exercise.
There should be clear, complete and concise, narrative analysis. It is critical
there is comparative analysis of the Primary and Secondary Corporation, to
include Industry.
B. The journal provides the opportunity for you to demonstrate your success
in achieving the Student Learning Outcomes outlined in the course syllabus.
C. The journal and needs to have detail:
1. Use the coverage from the weekly lectures to perform the ratio
analysis, and financial analysis
2. You will effectively complete all of the required ratios and
interpretation required for the final summary analysis
3. You need to use the homework from each chapter, case study,
class discussion and assessment as a basis for demonstrating in the
journal your ability to apply what you have learned with the analysis of
your primary and secondary company
D. Income Statement
1. The income statement is one of four major financial statements
used to communicate the required accounting information about a
business. In an annual report the income statement may be called a
statement of earnings or statement of operations, or some other similar
title. What is the purpose of the income statement?
2. The primary components summarized on an income statement are
an entity’s revenues and expenses. Note that income statements are
usually presented for the current year as well as two prior years, which
permits analysis of trends over time.
a) For a merchandising or manufacturing company, the largest
revenue is derived from sales of its products. For the current and
prior fiscal years, what are your company’s net sales (remember to
write your answers in thousands, millions, etc.)? Current year,
Prior two years
b) Discuss the trend in sales over the past two years and
provide an explanation for this trend (hint: refer to Management’s
discussion and Analysis for possible explanations)
(1) The level and percentage changes of total revenues,
the components of revenues, cost of sales, major expenses,
operating income, net income, or earnings per share over
the period being analyzed
(2) The trend in the relationship between revenues and
cost of sales, revenues and operating income, or revenues
and net income over the period being analyzed
(3) The causes of changes in the components of income
statement accounts
(4) Vertical analysis, common size, investigation of
specific income statement items that affect profitability trends
over time. Perform vertical analysis for your companies for
the income statement
(a) Cost of goods, gross profit, operating
expenses, income (loss) from operations, other
revenues and expenses, Income (loss) before income
taxes, income tax expenses, net income
(5) Interpretation of trends over time: based on your
horizontal (trend/growth) and vertical (common size)
analysis, discuss your company’s trends in profitability over
the past two years. Based on your vertical analysis plus
further investigation, identify specific items in the income
statement most significant in explaining changes over time in
income as a percentage of net sales.
(6) The effect of “one-time” gains or losses on net income
and on the calculation of trends in earnings
(7) The effect of major acquisitions or divestitures on
revenues, expenses, or net income.
(8) Merchandising companies compute an important
subtotal called gross profit, also referred to as gross margin.
For the current and prior fiscal year, what is the company’s
gross profits amount? If it is not shown separately on the
income statement, calculate the amount.
(9) Gross profits less operating expenses is called
income from operations. Companies may also refer to this
amount as operating income/earnings/profit, or may even
label the amount. For the current and prior fiscal years, what
is your company’s income from operations? If it is not shown
separately on the income statement, calculate the amount.
c) Industry Comparisons
(1) A comparison to industry-wide ratios can help to
evaluate how well the company is doing relative to industry.
(a) Profit Margin, Asset turnover, Return on Assets
(2) Overall profitability (i.e. return on assets ROA) results
from interaction of profit margin and asset turnover.
Compare your companies’ ratios to the industry and discuss
whether your companies are performing better or worse than
the industry on each, and also discuss whether the
difference in ROA results primarily from the profit margin or
asset turnover or both.
3. Analysis of Financial Position; Income Statement
(1) Compare and contrast two companies’ and Industry
Profitability ratios, current and prior year:
(a) Return on Equity (ROE)
(b) Return on Assets (ROA)
(c) Financial Leverage % (ROE – ROA)
(d) Net profit margin
(e) Earnings per share (EPS)
(f) Earnings quality (Cash flow from
operations/Net Income)
(g) PE Ratio (Price earnings ratio)
(2) Compare and contrast two companies’ and Industry
Asset Turnover Ratios, current and prior year:
(a) Total Asset Turnover
(b) Fixed Asset turnover
(c) Receivable turnover ratio (to include DSO,
days sales outstanding)
(d) Inventory turnover ratio (to includes days of
inventory)
E. Balance Sheet
1. The balance sheet is one of four major financial statements used to
communicate the required accounting information about a business. In an
annual report, the balance sheet may also be called a statement of
financial position. What is the purpose of the balance sheet
2. The components of the balance sheet are assets, liabilities, and
stockholders ‘equity
a) From the textbook/notes, what are the four main categories
used for assets on a classified balance sheet? Indicate these
categories, total amounts for each category on your companies’
balances sheets for the current and prior year-end. Note if your
company combines several categories into an “other” category,
show amounts in the proper category (hint: you may need to refer
to the notes in the financial statements to identify accounts included
in the Other category)
(1) Cash and Cash Equivalents, how does company
define cash equivalents
(2) Inventories; what accounting policy does your
company disclosed for inventory valuation and which
method(s) is (are) used by your companies’ to determine
cost of inventory?
(3) Property, Plant and Equipment
(a) Identify the accounts listed in property, plant
and equipment by your company
(b) What depreciation method(s) is (are) used by
your companies’?
(c) What amounts are disclosed by your company
for; depreciation expense for the current and prior
fiscal years, accumulated depreciation at the end of
the current and prior fiscal years
(4) What types of intangible assets are owned by your
companies’?
b) From the textbook/notes what are the two categories used
for liabilities on the classified balance sheet? Indicate these
categories and the total amounts for each category on your
companies’ balance sheet for the current and prior year-end.
c) Long Term Debt: Companies’ primary use of long-term debt
instruments which are notes payable and bonds payable. At the
current and prior year-end for what are the two largest amounts of
long term debt? Interest rate, term, and carrying value?
d) Indicated the total amount for the current and prior year-end
on your company’s balance sheet for each stockholders’ equity item
(1) Common Stock, additional paid-in capital, Treasury
Stock
3. Balance Sheet Financial Analysis comparison of two companies for
current and prior year
a) The level and percentage changes in cash, inventory,
working capital, fixed assets, and debt
b) The trend in the current, acid test, debt-to-assets, and debt-
to-equity ratios
c) The relationship between cash and investments, cash and
current liabilities, and investments and debt
d) The relationship between changes in receivables or
inventory and changes in revenues
e) The relationship between increases in fixed assets and a
company’s desire to expand operations
f) The potential implications of having large cash balances, in
terms of acquiring other companies or being an acquisition target.
4. Common stock, paid in capital, retained earnings, and treasury
Stock
a) Do the companies report treasury stock? If so what dollar
amount does it report? Did companies repurchase treasure stock
during the current and previous year? If so why?
b) Did the companies pay dividends?
c) What is the par value of stock? How many shares of
common stock are authorized? How many shares are issued? How
many shares are outstanding?
5. Analysis of Financial Position; Balance Sheet
(1) Compare and contrast two companies’ and Industry
Liquidity ratios, current and prior year:
(a) Current Ratio
(b) Quick Ratio
(c) Cash Ratio (Cash & Equivalents/Current
Liabilities)
(d) Working Capital
(2) Discuss and compare companies’ liquidity position.
How do your companies’ compare to the industry? What is
the trend over the past two years for the companies’ working
capital and current ratio? Identify and provide an explanation
of events underlying the changes. (Hint: refer to
Management’s discussion and analysis, and prior case study
analysis with AEO and UO for possible explanations.
(3) Compare and contrast two companies’ and Industry
Solvency ratios, current and prior year:
(a) Times Interest earned Ratio
(b) Debt to Equity Ratio
(c) Financial Leverage Ratio
(d) Financial Leverage %
(4) Discuss and compare companies’ solvency. How do
the companies’ compare to the industry? What is the trend
over the past two years? Identify and provide explanation of
events underlying the changes. Indicate the level of risk vs.
industry. Identify specific accounts most significant in
explaining the changes.
(5) Compare and contrast two companies’ and industry
Market Ratios
(a) Price/Earnings (PE) ratio
(b) Dividend Yield ratio
F. Cash Flow Statement
1. The Cash Flow statement is one of four major financial statements
used to communicate the required accounting information about a
business. In an annual report, the Cash Flow statement may also be
Consolidated Statements of Cash Flows. What is the purpose of the Cash
Flow Statement? What are the three major components, and what does
each analyze?
2. The components of the Cash Flow are Operating Activities,
Investing Activities and Financing activities. Compare two companies to
current and prior fiscal years
a) On the statement of cash flows, what was the largest item (in
absolute value) listed under “adjustment to reconcile net income to
net cash provided by operating activities”? Explain the direction of
its effect on the reconciliation.
b) What was the largest “changes in assets and liabilities” in
the operating section of the cash flow statement? Explain the
direction of its effect in reconciliation. What caused the change?
Refer to the notes.
c) Examine the investing and financing activities for the two
companies. List and compare the companies’ three largest uses of
cash over the past three years. What was the cause for change,
and major sources of cash?
d) Have the companies paid cash dividends or repurchased
stock? Compare and contrast
e) Compute the quality of income ratio for both companies for
current and prior year, which company has the better quality of
income? Why? Compare to the industry average.
3. Cash Flow Financial Analysis comparison of two companies for
current and prior year (note: many of these question will require the use of
the Management Discussion and Analysis section of the 10K’s. Some of
these events may not have occurred with one or both companies)
a) The appropriateness of increasing fixed assets in order to
expand
b) The appropriateness of divestitures of businesses in
underperforming areas
c) The appropriateness of investing in securities rather than in
core productive assets
d) The risks and appropriateness of obtaining financing through
debt or equity
e) The appropriateness of early retirements of debt
f) The reasons for acquiring treasury stock and the
appropriateness of such acquisitions
g) The appropriateness of paying or increasing dividends, and
the trade-off between paying dividends and reinvesting in the
company; or negative aspects of decreasing dividends.
G. MARKET DATA ANALYSIS Summary
1. Prepare a form similar to the one below for the current and prior
year of your primary company, current year for your competitor.
2. Some companies will have different names for these accounts;
others will not have any balances in the accounts.
3. You may rename the accounts, if desired. Put N/A if the account
name is not applicable for your company. Use Word or Excel.
4. Where it states to use the Current Year numbers, you are to use
the numbers from the annual report you have been working with since the
beginning of the semester.
a) You may have other accounts that are not listed below.
Expand the table to include the “other” accounts
b) Note: not all of the information may be available, this is OK.
In addition, it is OK to add additional accounts critical to the
analysis of the two corporations. Some of the companies on the
selection list are emerging technologies. I highly recommend this
be complete at the very beginning of the project. This will be
a very useful research tool for analyzing the trend analysis in the
accounts, and the ratio analysis.
c) If the information is not available, try to understand why, and
discuss in your final analysis.
d) This is a summary of the annual report, 10k. You need to
extract the information from the financial statements; Income
statement, Balance Sheet, Statement of Stockholder Equity and
cash flow statement.
Primary
Company
Current Quarter
Primary
Company
Current Year
Primary
Company
Prior Year
Competitor
Current
Year
Monetary Units (thousands,
millions)
Cash & Cash Equivalents
Accounts Receivable
Inventory
Marketable Securities
Total Current Assets
Property, Plant, & Equip
Accumulated Depreciation
Total Assets
Total Current Liabilities
Long-term Liabilities
Total Liabilities
Contributed Capital
Retained Earnings
Total Stockholders’ Equity
Net Sales/Revenue
Cost of Sales
Gross Profit
Operating Expenses
Depreciation Expense
Net Income
Inc./Dec. in Cash
Dividends Paid
Inventory Valuation Method
Depreciation Method(s)
H. RATIO ANALYSIS Summary:
1. Ratios need to be included with each chapter journal/analysis. It is
important to provide the calculations, analysis and interpretation. Use a
form similar to the one below to summarize the results. The table will be
very useful for seeing the interconnections, and trends as an easy to read
summary. In addition, in the preparation SUMMARY write-up, very useful
to have the table available to inform conclusions and comparisons.
a) Note: Refer to Chapter 13 as reference for all of the ratios
covered during the course. Remember the chapter is only a
“summary” the detail for each ratio is found in each specific chapter
covered during the course of the semester.
b) Note: Do not use the ratios from the various financial
websites. The ratios on the financial websites are slightly different.
You are expected to complete the ratios on your own.
c) It is critical that you show your work and how you calculated
the ratio. When calculating ratios that require averages (average
inventory, average accounts receivable, etc.) use the average (i.e.
(prior and current year)/2. Three years of data will be required to
calculate the prior year average. This will require you to have
access to the most current annual report and look at the multiyear
information provided in the report, or use the prior year annual
report.
d) Note: you must show the work, the answer alone is
insufficient when describing in the journal).
e) Many of the ratios will not have an industry average,
therefore enter what is available for the industry averages. This, of
course, is not the "perfect" way because you will compare "old"
numbers to current industry averages, but this is a learning
exercise to show you understand the concepts and can interpret
the ratio with regard to the company performance.
f) Remember, it's the process that counts! Show all of your
work for the ratios, and discuss what each ratio indicates about the
company performance. This is absolutely critical to the final project.
Ratio Summary Table: (Note this table will be completed as each chapter of the text is completed. By
the end of the project the entire table should be complete and available for the team to complete the
Summary requirement.
Primary
Company
Current Year
Primary
Company
Prior Year
Competitor
Current Year
Industry
Average
Liquidity Analysis:
Cash ratio
Current ratio
Quick (acid test) ratio
Accounts receivable turnover
Average age of receivables
Solvency Analysis:
Debt to Equity ratio
Profitability Analysis:
Return on equity
Return on assets
Financial Leverage Percentage
Earnings per share (your calculation from
annual report)
Profit margin
Gross profit percentage
Fixed asset turnover ratio
Inventory Analysis:
Inventory turnover
Average Days’ Supply in inventory
IX. Written Summary Analysis / Presentation (Total 60 points)
A. The most important part - Write a summary report based on the
information and ratios of the companies and industry averages. (35 points)
B. This should be an integrated report rather than separate reports for each
company.
C. Compare and contrast the companies with each other and with the
industry, indicating which company seems to have the better ratios for each
category. (Financial Accounting, As a Second Language, David P. Weiner (This
is an excellent resource, use it as a basis for your summary analysis)
1. Report news that may explain any changes you have found in your
companies.
2. What are the strengths/weaknesses of each company (SWOT;
strengths, weakness, opportunities and threats)?
3. The relative sizes of the two companies being analyzed and the
impact of size differences on company stability and flexibility;
4. The two companies’ trends in revenues, costs, operating income,
net income, earnings per share, and dividends;
5. The relative ability of the two companies to meet their obligations
as evidenced by working capital, acid test ratios, current ratios, and debt-
to-asset ratios;
6. The two companies’ strategies in terms of levels and areas of
expansion;
7. The relative performance of the two companies’ equity shares on
the stock market;
8. The relative rankings of the companies on customer satisfaction
surveys and in market share;
9. The relative quality and stability of company management; and
10. The importance of customer service and customer satisfaction;
11. The relative standing of the company in customer satisfaction
rankings and in market share;
12. The importance of marketing campaigns to maintaining and
increasing market share;
13. The importance of proper geographic selection and political
stability;
14. The impact of government regulations;
15. The impact of changes in general economic conditions;
16. The quality and stability of senior management; and
17. The company’s emphasis on social responsibility and ethical
business practices.
D. Interpret the ratios and use as the basis for analysis of the operational
effectiveness of primary company. Use the comparative company (i.e. the
secondary company) as one of the elements in the industry and similar
businesses. Using the ratios as the scalpel to cut through the public reporting
and determine the WHY, HOW and POTENTIAL for the business.
1. Based on the information gathered, which company do you think
would be the better investment for the future? WHY?
2. Attach the report and the above forms you have created in Word or
Excel, and submit as to total project.
3. A Grading Rubric is provided as a separate document to assist with
preparing the final submission.
E. Final analysis Written Summary is the most critical portion of the final
project, it is worth 25 points. The final project represents your accumulated
understanding of Financial Accounting 1A, it is the CAPSTONE for the course.
F. Prepare a 15 minute presentation for the class summarizing the results of
your team’s project. Each member of the team MUST participate in the
presentation, and after the presentation you will be expected to entertain
questions for 5-10 minutes from both the class and the professor. See grading
rubric for content requirements (25 points)