Financial Accounting Information

Financial Statement Analysis Case Assignments[i]

SUMMARY OF PROJECT

To help you learn to apply what we are learning in this class, you will prepare a report that analyses the financial statements of a specific publicly traded company. This will be a group project. You will be assigned to a group of 3-5 students to complete this project.

The companies chosen will be publicly traded companies that are listed on a US Stock Exchange, that have at least three years of consecutive data available, and that have at least one well known competitor with similar credentials. Examples of appropriate company pairs are:

 

1. Apple/Samsung
2. Starbucks/Dunkin Donuts
3. Pepsi/Coke
4. UPS/FedEx
5. Papa John’s/Dominos
6. McDonalds/Burger King
7. Verizon/AT&T
8. Lowes/Home Depot
9. Walmart/Target
10. Ford/General Motors
11. Hasbro/Mattel
12. Bank of Am./Wells Fargo

 

This is to be a written report that is no more than six pages long (excluding covers, table of contents, and other required materials), must be typed, double spaced, and use a ten-point font. See the syllabus for the due date. You will use citations for annual reports as noted in the assignment below; any other references used will be cited using APA or MLA.

With your analysis, you must submit a copy of the annual reports for your base company, and excerpts from the comparison company for any information cited (at minimum, the financial statements). Your analysis must include page references to relevant portions of the annual reports, and the relevant portions of the annual reports must be highlighted. Your report must also contain appropriate quotation marks for quoted material and appropriate citations for material taken from sources outside the financial statements. Please note that annual reports can be quite lengthy. If you contact the company’s investor relations department, they may send you a printed copy of the most recent 10-K.

If you complete the assignment early, I will review it with you before or after class and give you feedback on the report. You can then use that feedback to improve you report to ensure that you get the best grade possible on this.

The final project should include the following:

1. The six-page analysis described above with any covers, tables of contents, etc.
2. Team evaluations
3. Citations page (APA, MLA, or Chicago)
4. The complete annual report of your company
5. The financials and any referenced materials from the competition

 

 

 

Analysis Requirements:

1. Obtain the most recent annual report for the two companies assigned to your group (The base company and the comparison company). The reports should contain at least three years of income statement data and two years of balance sheet data.
2. Analyze at least 3 (three) items on the income statement for your base company that would be important to an investor, and discuss whether your company’s performance related to these items appeared to be improving, deteriorating, or remaining stable. Justify your answer.
3. Analyze at least 3 (three) items on the balance sheet for your base company that would be important to an investor, and discuss whether your company’s performance related to these items appeared to be improving, deteriorating, or remaining stable. Justify your answer.
4. Analyze your base company’s investing and financing activities for the most recent year as identified in the statement of cash flows, specifically identifying the two largest investing activities and the two largest financing activities. Discuss whether you agree or disagree with the investing and financing strategies that your company appears to be employing.
5. Identify 2 (two) items not included in (or derived from) the financial statements that you think would be important to someone considering whether to invest in your company. Discuss your reasons for believing that these two items about the company would be important in making an investment decision. (Hint: you might want to consider items discussed in other business classes.)
6. Compare your base company’s financial statements with those of the comparison company. If you were making a decision to invest in one of the two companies, which company would you choose? Why? (Note: your answer in this section must include some financial issues, but your answer need not be limited to a discussion of financial issues.)
7. Go to http://esearch.ut.edu and login using your UT email username and password.
   1. Go to one of the following: Business and Company Resource Center, Mergent Online, Standard & Poors or Value Line.
   2. Search for your US company then look for analysis of the company’s stock.
   3. Here you will search for analysis about your company prepared by professional analysts from large brokerage houses or these data companies (the Business and Company Resource Center has the largest variety of reports). Find a recent analysis of your company, these are usually one to seven page write-ups.
   4. Next, go to Morningstar (also on esearch) and read the Morningstar analysis on your company.
   5. Summarize in your own words your understanding of the outlook for your company in one paragraph.
   6. Cite the name of the analyst (if available), firm your analyst works for and date (which must be no less than one year old) of the research report on the stock, include both current and target stock price or, if no target price is stated whether the analyst rates the stock as “outperform”, “market perform”, “underperform”, buy, sell, hold or something else.
8. In one to two paragraphs explain if you think that stock in this company is a good investment for you personally (assume you have $10,000 to invest, would you choose this company?).

Team Evaluation Forms:

Please submit a one to two-page review of the process that your team followed in completing the project for this class. Each project should only have one overall review. Your review should include a description of:

1. the way that the team was organized (was there a “team leader,” were there regular team meetings?);
2. the contribution that each member of the team (including yourself) made to the project (did everyone contribute equally, did someone make an exceptional contribution, did someone fail to contribute, etc.?);
3. any conflicts that arose with your team and how the conflicts were resolved (if they were resolved);
4. how effective you believe that your team was in completing the project and
5. anything that you believe would have added to your team’s effectiveness. In addition, please include any suggestions that you have for improving the project in future classes.

Finally, each member should evaluate each member of your team, including themselves, using the following scale:

5: The teammate did much more than his/her share.

4: The teammate did somewhat more than his/her share.

3: The teammate did approximately his/her share.

2: The teammate did somewhat less than his/her share.

1: The teammate did much less than his/her share.

0: The teammate did not contribute to the project at all.

 

Note: The “default” rating should be a “3.” Giving every member of the team a “5” will be viewed identically to giving every member of the team a “3.”

Teammates whose ratings average 1 point above that of the team will have their scores raised by 5%. Teammates whose ratings are less than 1 point above the team average and at least 2.41 will receive the grade on the paper that is determined by the grading rubric. Teammates whose scores average between 1.5 and 2.4 will have their project grade lowered by 10%. Teammates whose scores average between 0.5 and 1.49 will have their project grade lowered by 20%. Teammates whose scores average below 0.5 will receive a zero on the project.

Grading Rubric:

The analysis is worth 100 points and I will use the following rubric to determine the score earned by the team’s paper.

First, the projects will be reviewed for compliance with the basic requirements and for composition. Any projects submitted without the entire annual reports for both companies being discussed, without appropriate page references to the relevant portions of the annual reports, without appropriate highlighting of the relevant portions of the annual reports, without appropriate citations for material taken from sources outside the annual reports, and/or with excessive composition errors will have to be resubmitted. Any papers requiring resubmission for the above reasons will be docked a minimum of 20 points out of 115.

Second, the papers will be reviewed for content and will be graded using the following rubric

90-100 points: The paper is well written, free of grammatical and other writing errors, and well organized. The report addresses each of the issues specified in the requirements, uses appropriate examples to illustrate concepts discussed, and integrates the annual report data with the narrative. The report focuses on important items, demonstrates a thorough understanding of the relationships among financial statement data, and is cohesive.

80-89 points: The paper generally is well written but may have minor grammatical or other writing errors or lack smooth transitions. The report addresses the issues specified in the requirements, demonstrates understanding, and focuses mainly on important items, but does not fully synthesize the material being discussed, and/or does not integrate the annual report data with the narrative.

70-79 points: The paper does not have excessive grammatical or other writing errors. The report addresses the issues specified in the requirements, but demonstrates only moderate understanding, and/or lacks integration.

60-69 points: The paper does not have excessive grammatical or other writing errors. The report addresses the issues specified in the requirements, but demonstrates only minimal understanding of one or more of the issues.

50-59 points: The paper is acceptable after initially requiring resubmission due to failure to comply with the basic requirements, excessive composition errors, or failure to demonstrate understanding of two or more of the issues required to be discussed.

0 points: The paper fails to meet the basic requirements, has excessive composition errors, and/or fails to demonstrate understanding of two or more of the issues required to be discussed after a first resubmission.

Note: your individual score will be based on the score above, but will be modified by the team evaluation forms. It IS possible to exceed the 100 points and get “extra” credit.

Presentation

An additional 25 points is assigned to a brief presentation on your analysis. This will be completed on the last day of class; it should be a 5-10 minute presentation covering:

1. A summary of your company and their industry
2. Why you chose the ratios you used
3. How your company compared to the competition
4. Your thoughts on investing in this company

PowerPoint, Prezi, and handouts are optional. All members must contribute for them to get these points. i.e., if one person opts to not participate in the presentation, they will forfeit their points but it will not impact the score of those who do participate.

The presentation will be graded as follows:

25 points: The presentation meets all requirements noted above.

20 points: The presentation meets 3 of the requirements noted above.

10 points: The presentation meets 1-2 of the requirements noted above.

0 points: No presentation.

There will be a 5 point deduction for presentations that are too long or too short.

Finding Annual Reports

You are required to turn in a copy of both companies’ annual reports with your group project. The best way to obtain annual reports is to request them directly from the company. You may find a company’s contact information on its website (usually in an SEC Filings or Investor Relations/Information tab). You should request two copies, and exchange the second with the group using your company for comparison. Annual reports are also available on the SEC website, http://sec.gov/, and through the university library website using either the S&P Market Insight or Lexis-Nexis databases.

Company Website Example: finding an annual report for Kroger:

• Type Kroger.com into the web browser address bar
• Click the link SEC Filings towards the bottom of the screen
• Click on one of the links to open a PDF document or
• Click the Contact US link for contact information

SEC Website Example: finding a 10-K report for Kroger:

• Click the link Search for Company Filings under Filings & Forms (EDGAR)
• Click the link for Full Text Search on the left-hand side of the screen
• Click the link for Advanced Search on the right-hand side of the screen
• Go to the In Form Type pull-down menu and click on 10-K
• Type the company name in the appropriate box
• Click on Search

Examples of Appropriate Responses by Requirement

To help you in your analysis, I have several prompts for sections 2-6 to help you determine what types of analyses might be relevant to your company. Additional ideas will come from class discussions, your own research, and your textbook. Note that not all of the prompts below need to be used, and you are not limited to only these prompts.

Income statement

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. The effect of “one-time” gains or losses on net income and on the calculation of trends in earnings; and
5. The effect of major acquisitions or divestitures on revenues, expenses, or net income

Balance Sheet

1. The level and percentage changes in cash, inventory, working capital, fixed assets, and debt;
2. The trend in the current, acid test, debt-to-assets, and debt-to-equity ratios;
3. The relationship between cash and investments, cash and current liabilities, and investments and debt;
4. The relationship between changes in receivables or inventory and changes in revenues;
5. The relationship between increases in fixed assets and a company’s desire to expand operations; and
6. The potential implications of having large cash balances, in terms of acquiring other companies or being an acquisition target

Statement of Cash Flows

1. The appropriateness of increasing fixed assets in order to expand;
2. The appropriateness of divestitures of businesses in underperforming areas;
3. The appropriateness of investing in securities rather than in core productive assets;
4. The risks and appropriateness of obtaining financing through debt or equity;
5. The appropriateness of early retirements of debt;
6. The reasons for acquiring treasury stock and the appropriateness of such acquisitions;
7. The appropriateness of paying or increasing dividends, and the trade-off between paying dividends and reinvesting in the company; and
8. The negative aspects of decreasing dividends.

Non-Financial Items

1. The importance of customer service and customer satisfaction;
2. The relative standing of the company in customer satisfaction rankings and in market share;
3. The importance of marketing campaigns to maintaining and increasing market share;
4. The importance of proper geographic selection and political stability;
5. The impact of government regulations;
6. The impact of changes in general economic conditions;
7. The quality and stability of senior management; and
8. The company’s emphasis on social responsibility and ethical business practices.

Comparison and Recommendations

1. The relative sizes of the two companies being analyzed and the impact of size differences on company stability and flexibility;
2. The two companies’ trends in revenues, costs, operating income, net income, earnings per share, and dividends;
3. 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;
4. The two companies’ strategies in terms of levels and areas of expansion;
5. The relative performance of the two companies’ equity shares on the stock market;
6. The relative rankings of the companies on customer satisfaction surveys and in market share;
7. The relative quality and stability of company management; and
8. The importance of determining whether an investor is looking for short-term returns or long-term growth.

 

[i] This assignment is based on

Misch, M., & Galantine, C. (n.d.). A FINANCIAL STATEMENT ANALYSIS PROJECT FOR INTRODUCTORY FINANCIAL ACCOUNTING. Global Perspectives on Accounting Education, 6(2009), 83-96. Retrieved December 29, 2015, from http://gpae.bryant.edu/~gpae/Vol6/A Financial Statement Anlysis Project.pdf