FINANCIAL STATEMENT ANALYSIS
NAMES OF GROUP MEMBERS
(The group may allocate the work among themselves. In that case each member may focus on some specific parts for report preparation purpose; every member should review all parts and is responsible for the entire project in order to achieve the term project objectives.)
Name of the corporation analyzed: ____Honda____________________________
[This report will not be returned to you. Keep a copy For Your Reference if you wish]
THIS TERM PROJECT HAS FOUR PARTS:
- Reading and understanding financial statements
- Analysis of financial statements
- Class presentation of the high lights (Executive Summary)
Your answers must be typed. For this purpose, a copy of this project is presented electronically and you can type your answers in the given spaces. Type you answers in Italic font to differentiate your answers from the questions.
Visit UNH Accounting Club Website for a complete list of available resources for your term project: http://newton.newhaven.edu/accounting. You can access the resources available on the Accounting Club website and UNH library from Home as well on campus.
Annual reports produced by companies are a primary source of information about a company’s activities over a specific period of time. The information disclosed in these reports is prepared by the company’s management and is useful to different users, mainly investors and creditors.
The primary purpose of an annual report is to convince existing shareholders to continue investing in the corporation. However, management may also use the annual report to: (1) persuade prospective shareholders to invest in the corporation, (2) inform financial analysts about the investment quality of the corporation, (3) inform lenders, such as bankers and suppliers, of the credit-worthiness of the corporation, and (4) provide evidence to government agencies of compliance with regulations.
As a manager, you are (or will become) involved in the preparation of financial statements, which entails knowledge of the disclosure requirements. Furthermore, you will most probably use financial statements frequently in your profession. For example, as a manager, you will be the responsible person for the accuracy of the information in the financial statement. As an analyst, you may be asked to advise clients about investments in particular companies. More importantly, as an individual investor you may use financial statements to select your personal investments.
The basic purpose of the Financial Statement Project is to “get your hands dirty” with analysis of a public company.
The objectives of this project are:
- To expose you to alternative formats for presentation of financial statement disclosures as well as the accounting terminology which may differ across companies.
- To integrate real world illustrations of the accounting issues and disclosures related to the specific topics covered in this course in order to gain a better understanding of the course material.
- To formally perform financial statement analysis and prepare the report.
- To enhance your business research skills by searching for company-related information in current business periodicals, the financial press, and other financial publications.
You are asked to divide the class into groups of two students per group. You will be assigned a public company or you can choose the company that you are working for if it is a public company. When you receive the annual report, familiarize yourself with its contents by reviewing it carefully. Annual reports usually have a contents page to help you locate specific items.
The project comprises several parts and requires you to locate and extract specific information from the corporation’s financial statements, especially the notes and supporting schedules which are located after the financial statements in the annual report. Notes provide additional explanations, descriptions, and supporting information not conveniently displayed within the body of the financial statements. Supporting schedules are tables that provide more detailed information about certain items in the primary financial statements.
Inexperienced financial statement users sometimes regard the notes and supporting schedules as unimportant. However, most of the information contained in the notes and schedules are required by GAAP and provide potentially valuable information to financial statement users concerning the corporation. For example, a contingent liability may be shown in the notes rather than the liability section of the balance sheet. A financial statement user who ignores the notes would not be aware of any contingencies that may occur.
Read the instructions carefully and write your answers in the space provided. If the space is insufficient, use additional sheets.
- If the requested information is not disclosed by the corporation, write “not disclosed” in the blank space. Note, however, that some of the requested information may not be disclosed, but could be calculated based on the disclosed information.
- Whenever possible, give page numbers in the annual report so that your answers can be checked or your computations cab be verifies.
- Indicate whether dollar amounts are in thousands or millions of dollars.
- Hints on finding the information:
- Disclosures may be contained in the financial statements and/or in the notes;
- Not all disclosures pertaining to a topic are necessarily contained in one note, so you need to skim the content of other notes to make sure you haven’t missed anything. Be sure to always check the “significant accounting policies” related to each major topic.
- Financial statements are “condensed,” i.e., there is not a separate line item shown for every account that you will encounter in this course. As a result, if you don’t see a particular item in the statement, you may find the item disclosed in the notes.
- Some annual reports will not contain the requested information. When the structure of the financial statements make it impossible to answer certain questions, simply indicate why you are unable to answer the question as stated.
- The term “current” refers to the year for which the annual report was prepared.
- Certain parts of this project require calculation of selected ratios. Although instructions are given for ratio calculations, you may wish to refer to the related chapters in the textbook for a review of the computations and interpretations of some of these ratios.
- Enclose all supporting documents and extra pages that you may use to prepare this report.
READING AND UNDERSTANDING FINANCIAL STATEMENTS
NAME OF CORPORATION ANALYZED: Honda
PART 1: GENERAL INFORMATION
The requested general information may be disclosed in several places in the corporation’s annual report. Answer the following questions about the annual report you have selected:
- In which city and state is (are) the corporate headquarter(s) located?
- When is the fiscal year end of the corporation?
- What is (are) the primary product(s) of the corporation?
Indicate SIC code(s). If SIC code(s) is (are) not provided, find it out from the sources available in the library and state the source that you used.
What SIC code means and why it is important?
- Publicly traded corporations are required to have an annual audit. The auditor attests to the credibility of a corporation’s financial statements. Who is the corporation’s auditor?
There are four types of audit report: unqualified, qualified, denial, no opinion. Which one was issued for this company? If there was any specific explanation in the audit report, explain it.
- Shares of publicly traded corporations are traded in organized exchange markets (maybe more than one stock market).
- Indicate the exchange market(s) on which the corporation’s shares are traded:
- List the source from which you obtained the information about market listing?
- The ticker symbol is an abbreviation that identifies the corporation’s shares on the stock exchange. What is (are) the ticker symbol(s) used to identify the corporation on the stock exchange(s)?
Ticker symbol (s): —————————————
Source of information: ———————————-
- The first note in the annual report usually summarizes the significant accounting policies used by the corporation in the preparation of its financial statements. This note gives key information that investors require in order to be able to compare the financial statements of different companies. It is here that you will find information about the firm’s choice of inventory cost flow assumption (e.g., FIFO, LIFO, etc.) and important revenue recognition policies. Look at this note and briefly explain what is “significant” to note about how your company accounts for its transactions and operations. Attach a separate sheet if you need more space.
- The Management Discussion and Analysis (MD&A) is usually presented as a separate section and entitled as such. It is a requirement of the Ontario Securities Commission as well as many other exchanges. It is an opportunity for management to explain their perceptions of the operating results to the investors and other financial statement users. Answer the following questions concerning the MD&A.
- Management may use the discussion and analysis as an opportunity to highlight certain financial events such as significant changes in revenues or costs. Management may use the discussion to highlight certain non-financial events such as the opening of new retail outlets, sale or purchase of a subsidiary. What highlights are mentioned by management for your company?
- Is the tone of the management discussion optimistic or pessimistic? Give a few examples to support your response.
- Management may use the discussion as a forum for predicting events or stating the goals of the corporation. What predictions or goals were stated in the discussion and analysis section?
PART 2: THE BALANCE SHEET
The balance sheet summarizes the company’s assets, liabilities and equity. Assets are usually grouped into one of the following categories: current assets, investments, capital assets (property, plant and equipment and intangible assets), and other assets. Liabilities are grouped into current and long-term.
- On what page of the annual report does the balance sheet appear? ____
- Explain what the accounting equation is and how the balance presents this equation (pick up the appropriate numbers from the balance sheet):
- Asset Growth
The “size” of a corporation is commonly measured by the amount of total assets on the corporation’s balance sheet. A corporation is considered “growing” if total assets increase from one year to the next. The rate of growth is measured by the change in total assets divided by the total assets of the previous year:
- Determine the percentage growth in assets for this company. ____
- Identify the balance sheet accounts most significant in explaining the change in total assets of the corporation? What events might explain the reasons for the changes in these accounts?
- Common-size Analysis
Common size analysis is used to analyze the relative importance of each item on the balance sheet. Specific items are usually expressed as a percentage of total assets. These percentages are often compared to the percentage of previous years or to the percentages calculated for another corporation in the same industry. Complete common-size analysis for the following items for your company’s balance sheet.
Property, Plant & Equip.
Explain what you can infer from the common size analysis:
- Assessing Working Capital
Current assets are called “current” because they are converted into cash during the operating cycle. Current liabilities are liabilities liquidated by current assets or other current liabilities within the operating cycle. Working capital is equal to current assets minus current liabilities. In other words, working capital is the amount of current assets remaining after the current liabilities have been paid.
Working capital is considered a measure of the solvency of a corporation because a negative working capital indicates the corporation is not able to pay current liabilities maturing in the next operating cycle. Calculate working capital for the corporation as follows:
Minus: Current Liabilities
By how much did the amount of working capital increase or decrease compared to the previous year?___________
What balance sheet accounts explain the most significant changes in working capital?
What can you infer from the working capital analysis?
PART 3: THE INCOME STATEMENT
The income statement or statement of earnings summarizes corporate revenues and expenses for a period of time. Presentation of several years permits comparisons to previous years’ results.
On what page in the annual report does the income statement appear? _____
- Growth in Sales and Profits
- Sales growth is indicated by calculating the percentage increase (decrease) of sales in comparison with the previous year.
Indicate the growth in sales during the current year (show your computations):
- Did sales increase or decrease? An explanation of the change in sales is often contained in the Management Discussion and Analysis (MD&A). What reasons did management give for the change?
- Trends in corporate profits are determined by calculating the percentage increase (decrease) of income from continuing operations over the previous year. Income from continuing operations is net income without the effects of any discontinued operations, extraordinary items, or cumulative effects of accounting changes.
Determine the growth in profits during the current year: _____
What can you infer from the analysis of growth in profit?
- Common-Size Analysis
Common-size (or percentage) analysis expresses items in a financial statement as a percentage of a single item. This analysis permits comparisons between two or more years, or between two or more corporations. For an income statement, certain items are usually expressed as a percentage of sales. Perform common-size analysis in relation to sales for the following items in the income statement for the current and previous years:
Cost of Goods Sold
R & D Expense
Income Tax Expense
Income from Continuing Operations
Based on your common-size analysis, compare current operating results in terms of cost control, debt servicing, and profitability. Information concerning the reasons for change may be found in the management discussion and analysis.
- Cost Control – a) Did the effect of cost of goods sold change in the current year in comparison to the previous year? What are possible explanations for changes, if any, that may have occurred?
- Cost Control – b) Did the effect of operating expenses change in the current year in comparison to the previous year? What are possible explanations for changes, if any, that may have occurred?
- How did the cost of debt (interest expense) change compare to the previous year? What are possible explanations for changes, if any?
- Profitability – How did the overall profitability of the corporation change in the current year? What items in the income statement explain the change in income from continuing operations as a percentage of sales?
- Generally accepted accounting principles require amounts related to discontinued operations and extraordinary items to be shown, net of taxes, at the bottom of the income statement. If any of these items are present, describe the nature and amount.
- Earning per share (EPS):
EPS is an important item on the income statement. It is an indicator of the firm’s financial performance. Some investment evaluation models relate changes in EPS to the changes in stock prices such as E/P ration (where E is earnings per share and P is stock price).
- What is EPS for your company?
Previews year: ________
Current year: _________
Show how these numbers are calculated. (There are two types of EPS: simple and fully diluted. Use simple EPS for this report)
- What can you infer from the change in EPS?
PART 4: EVALUATION OF THE CORPORATION’S DISCLOSURES
- Segment reporting is a useful requirement that requires firms to disclose their major customers, markets and products. Study this part of the financial statement and explain how it helps you to understand the company’s financial situation better. Be specific.
- As a user of the corporation’s financial statements, is there information that you expected to see but which was not disclosed in the financial statements? Limit your comments to the information needed to complete this project.
- Based on the corporation’s presentation of the information, which disclosures did you find most difficult to understand? Explain.
- What impressed you the most about the information that you had to examine? Be specific.
- What surprised you the most about the corporation’s disclosures? Be specific.
ANALYSIS OF FINANCIAL STATEMENT
- Compute the major ratios related to the firm’s liquidity situation and comment on the firm’s liquidity situation.
- Compute the major ratios related to the firm’s solvency situation and comment on the firm’s solvency situation.
- Compute the major ratios related to the firm’s profitability and comment on the firms profitability situation.
- Compute the major ratios related the firm’s market performance situation and comment on the firm’s market performance situation.
Part C: Executive Summary and Class Presentation of The High Lights:
Select your major findings from your analysis of this company and prepare an executive summary with some graphs. Submit the executive summary with your report. Also, prepare a 15 to 20 minutes presentation to present your findings to the class. You should prepare PowerPoint Slides for your presentation. You may prepare some handouts for students in the class to help them follow your presentation and ask their question, if they have any. Your presentation should be based on MAJOR FINANCIAL FINDINGS IN YOUR REPORT. Do not talk about non-financial issues more than couple of minutes. Your focus must be on financial ratios and your interpretations, and your suggestions for the company to improve its financial performance. This exercise also aims to improve your presentation skills. You may review a book about how to make an effective presentation (you can find it in public libraries or Barnes and Noble’s). The followings are some general suggestions:
- Do not write too much in each slide. Prepare slides in outline format (point by point format) and write only main points.
- Do not read from your slides. Talk about them to the class. Have a pointer to show audiences the points that you are talking about.
- Do not prepare two many slides.
- Have few sheets as handout for students.
- To not talk to me only (instructor) or any particular students in the class. Talk to the class as a whole.
- Watch your time and manage your time efficiently. Do not do beyond the given time. Give audiences time at the end to ask their questions.
- Make sure that you have introduction and conclusion at the beginning and end.