For this problem, you will need to select two publicly traded companies. For comparison purposes, the two companies should be competitors within the same industry. Once you have selected two publicly traded companies, obtain Form 10-K for each company for the most current fiscal year. Use the EDGAR database from the U.S. Securities and Exchange Commission (SEC) or the investor (or investor relations) page on the company’s site.
Follow these steps to find Form 10-K for each selected company using the SEC’s EDGAR database:
- Go to the Company Search Page by clicking the link in the Required Resources, under Internet Resources.
- Type the company’s official name in the Company Name box to search for the company’s filings.
- Select the 10-K form from the list of search results.
Analysis of the Financial Statements and Comparison of the Results
Your supervisor has given you an important task to complete for one of the firm’s top clients. The client has identified two companies within the same industry to add to his current portfolio. He does not want to add both since these are competing companies. Your task is to complete an analysis on these companies, compare the results, and provide a recommendation to the client.
Complete your analysis for the client using the financial statements and your prior knowledge of accounting, supplemented by textbooks or other references of your choosing, to answer the following questions and computations:
- What method does the company use to determine the cost of inventory for the fiscal year?
- Compute the inventory turnover ratio for the fiscal year. Also compute it for the previous two fiscal years. What conclusions can you make?
- What method of depreciation does the company use? Does the company use the same method for all fixed assets, or are different classes of assets depreciated differently?
- What is the amount of accumulated depreciation and amortization at the end of the most recent reporting year?
- For depreciation purposes, what is the estimated useful life of furniture and fixtures?
- What was the original cost of leasehold improvements owned by the company at the end of the most recent reporting year?
- What amount of depreciation and amortization was reported as expense for the most recent reporting year?
- How many shares of common stock are authorized at the end of the current year? How many shares are issued and outstanding at the end of the current year?
- Is there more than one class of common stock? If so, what is the name of each class of common stock?
- Is there any preferred stock? If so, what is the dividend rate on the preferred stock, as a percentage of the par value of the preferred stock?
- Did the company pay dividends on the common stock during the most recent reporting year? If so, what was the total amount of dividends paid and how much were they per share?
- Does the company have any treasury stock? If so how much?
- Has the company issued a stock dividend or a stock split over the past three reporting years? If so, what percentage and in what year or years?
- Does the company’s common stock have par value? If it does, what is the par value?
- Did the common stockholders buy back a significant amount of shares in the current year? You can see this in the Statement of Stockholders’ Equity as a reduction in shares.
- Does the company have any marketable securities at the end of the year? How many dollars of marketable securities? How are they classified? Short-term, long-term, or both?
- How much cash did the company use to purchase marketable securities during the current year, if any? Where did you look to find this information?
- Is the total amount of cash flows from operations the exact same amount regardless of whether the direct or the indirect method is used? Explain.
- How about the Financing and Investing Cash Flow sections? Are they the exact same regardless of whether the direct or the indirect method is used?
- Which method, the direct or indirect method, was used to report cash flows from operating activities? How can you be sure about this? Include in your answer the first three items in the Cash From Operations section.
- What is the major use of cash in the Cash From Investing Activities section?
- What is the major source of cash in the Cash From Investing Activities section?
- Are there any sources of cash in the Cash From Financing Activities section? What are they?
- Has the company paid cash dividends during the last three years? How do you know?
Deliverable to the Client: Summary and Investment Recommendation
Prepare a business memo addressed to the client summarizing your analysis and comparison of both companies and providing a recommendation on investing in one of the companies.
- Write 2–4 pages in a professional format appropriate for the information you are presenting.
- Make sure you have answered all of the provided questions and computations in your analysis. If a question or computation does not apply, there should be a statement within your memo stating that the aspect does not apply and why. For example: “Based on the review of the XYZ Company, there were no dividends paid for the year ending 20XX.”
- Include support for your conclusions and investment recommendation. Cite your own analysis and comparison of the companies, the companies’ financial statements, and other references of your choosing.