The project

ACC644 Financial Statement Analysis

Comprehensive Project

OBJECTIVE

Financial Statement Analysis project involves a team of students analyzing financial statements of two (2) companies ( FIRST COMPANY: GAP INC. – SECOND COMPANY: AMERICAN EAGLES) prepare a written analysis as well as recommendations.

ADDITIONAL RESOURCES

In addition to these guidelines, additional information is provided on the company’s Web site, library databases and the textbook including: formulas and guidelines for calculations, information about the two (2) companies being analyzed, and any special considerations related to the specific companies or current economic conditions.

DESCRIPTION

The team will be analyzing each company’s annual report (10-K filing), which serves as a “résumé” of a corporation. The Generally Accepted Accounting Principles (GAAP) and by the Securities and Exchange Commission (SEC) provide much of the information in corporate annual reports and in the 10-K. Specifically, GAAP requires annual reports to disclose four financial statements: a Balance Sheet, a Statement of Cash Flows, an Income Statement and a Statement of Retained Earnings.

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FINANCIAL STATEMENT ANALYSIS PROJECT

FALL 2012

FORMAT FOR PROJECT:

TITLE PAGE

The first page of the project is the title page, which lists the following:

• FINANCIAL STATEMENT ANALYSIS PROJECT

• Analysts’ (Participants’) Names

• Date

The body of the project must consist of the following six (6) sections – clearly marked.

SECTION 1: EXECUTIVE SUMMARY

In this section provide a brief overview of each of the two corporations. Participants are not limited but, at a minimum, should provide the following information for both companies:

• Official name of the corporation

• Location of the corporate headquarters

• The state in which the company is incorporated

• Company Internet address

• Stock symbol of the corporation and the exchange on which it is traded

• Fiscal year-end of the corporation

• Date of the 10-K filing according to the financial statements provided

• The company’s independent accountant/auditor

• The primary products(s) and/or services (s) of the corporation

SECTION 2: BALANCE SHEET ANALYSIS

1. Using elements listed on your company’s balance sheet, prepare a common size balance sheet using the following format. (Vertical Analysis Chapter 5)

COMPANY #1

Account

Current Year

%

Prior Year

‘ %

COMPANY #2

Account

Current Year

%

Prior Year

‘ %

2. Using elements listed on your company’s balance sheet calculate the increase or decrease in dollars and percent between the years using the following format. (Year to Year Change Analysis Chapter 5)

COMPANY #1

Account

Current Year

Prior Year

+/- $

%

COMPANY #2

Account

Current Year

Prior Year

+/- $

%

3. Using elements listed on your company’s balance sheet calculate the ratios and amounts using two years prior as the base year (100%) using the following format. Your answers should all be in percentages (Horizontal Analysis Chapter 5).

COMPANY #1

Account

Current Year/Base

Prior Year/Base

COMPANY #2

Account

Current Year/Base

Prior Year/Base

4. In thoughtful, well-organized paragraphs comment on changes you see in the balance sheet with regards to each company over the two-year period.

Among the items to consider:

a. Comment on any significant changes in each company in assets and liabilities.

b. Comment on any significant changes in each company in the composition of current assets and current liabilities.

c. Which assets in each company have the most significant investment?

d. Are the companies financed primarily with debt or equity?

e. Is the debt primarily short-term or long-term?

f. Compare the balance sheets of both companies with regards to size and composition of assets, liabilities, and stockholder’s equity.

SECTION 3: INCOME STATEMENT

1. Using elements listed on your companies’ income statement, prepare a common size income statement using the following format. (Vertical Analysis Chapter 5)

Company #1

Account

Current Year

%

Prior Year

%

Two Years Ago

%

Company #2

Account

Current Year

%

Prior Year

%

Two Years Ago

%

2. Using elements listed on your companies’ income statement calculate the increase or decrease in dollars and percent between the years using the following format. (Year to Year Change Analysis Chapter 5)

Company #1

Account

Current Year

Prior Year

+/- $

%

Two Years Ago

+/- $

%

Company #2

Account

Current Year

Prior Year

+/- $

%

Two Years Ago

+/- $

%

3. Using elements listed on your company’s income statement calculate the ratios and amounts using two years prior as the base year (100%) using the following format. Your answers should all be in percentages. (Horizontal Analysis Chapter 5)

Company #1

Account

Current Year/Base

Prior Year/Base

Two years ago/ Base

Company #2

Account

Current Year/Base

Prior Year/Base

Two years ago/ Base

4. In thoughtful, well-organized paragraphs comment on changes you see in the income statements for each company over the three-year period.

Among the items to consider:

a. What is the trend, in each company, in total revenues over the three years?

b. What is the trend, in each company, in gross profit over the three years?

c. What is the trend, in each company, in net income over the three years?

d. What is the trend in profit margin over the three years?

e. Comment on any significant changes in revenues or expenses, negative and positive changes for each company.

f. Comment on any significant changes in the discontinued operations, extraordinary items, or changes in accounting policy for each company.

SECTION 4: RATIO ANALYSIS

Compute the ratios for the most current year in following categories.The calculations used to determine the answers for the ratio analysis must be included in the appendix.

Liquidity Ratios

Company #1

Company #2

Current Ratio

Acid (Quick) Ratio

Working Capital

Cash Ratio

Days Sales in Receivables

Accounts Receivable Turnover

Accounts Receivable Turnover in Days

Days Sales in Inventory

Inventory Turnover

Inventory Turnover in Days

Operating Cycle

Sales to Working Capital

Operating Cash Flow to Current Maturities of Long-term Debt and Current Notes Payable

Long-Term Debt Paying Ability

Company #1

Company #2

Times Interest Earned

Fixed Charge Coverage Ratio

Debt Ratio

Debt / Equity Ratio

Debt to Tangible Net Worth Ratio

Operating Cash Flow / Total Debt

Profitability Ratios

Company #1

Company #2

Net Profit Margin

Total Asset turnover

Return on Assets

Sales to Fixed Assets

Return on Investment

Return on Total Equity

Return on Common Equity

Gross Profit Margin

Investor Ratios

Company #1

Company #2

Degree of Financial Leverage

EPS – Basic

EPS – Diluted

Price / Earnings Ratio

Percentage of Earnings Retained

Dividend Payout

Dividend Yield

Book Value

Operating Cash Flow / Cash Dividends

For each group of ratios, comment on:

As a category, what is being measured?

What does it mean?

What is the relative position of each of the corporations?

Who are the users of this information?

Which company is in the best overall position?

SECTION 5: CONCLUSIONS/RECOMMENDATIONS

Draw conclusions from the data that was gathered in the previous sections and determine the relevant position of each of the corporations in all of the analyses. The conclusions/recommendations must address the following as a comparison between

the two companies. The thoughtfulness of the analysis will be the most important factor in the evaluation of this section.

1. What are the overall strengths and weaknesses of each corporation?

2. What recommendation would you make to current and potential private or organizational investors in the two corporations?

3. What recommendation would you make to lenders regarding the credit-worthiness of the corporations?

4. Position, salary and benefits being equal, which company would you prefer to work for?

SECTION 6: PUBLIC PERCEPTION AND RECENT RESULTS

Regardless of the “on paper” financial strength of a company, decisions are often made based on the public perception of a company. A rumor within the financial industry may make it difficult for a company to obtain a loan. Negative publicity may force other companies and private citizens to “stop doing business” with a company. Even a company who performed well, but missed analyst projections, may see a drop in public confidence and a reduction in stock value. Yahoo finance is a great source for research. Based on current research, answer the following questions:

1. What is the general sentiment toward each company?

2. How does the financial industry currently perceive each company?

BASED ON THE FINDINGS:

3. How has public perception positively or negatively affected the companies?

4. What, if anything, has the company done to counter any negative sentiment that may exist?

5. How, if at all, has the company capitalized on any positive perceptions that may exist?

Finally, obtain the most recent financial reports filed with the SEC by each of the two companies and evaluate recent performance. Answer the following questions:

6. Since the 10-K filing analyzed in the previous Sections, how have each of the two companies generally performed?

7. Were there any noteworthy disclosures in the most recent filings?

BASED ON FINDINGS

8. How has each of the companies’ stock performed over the last 24 months?

9. Would you say the company has positive or negative momentum moving in to the close of its next fiscal year?

10. Would you change any of your conclusions or recommendations from the previous section based on current financial information?

ACC 644 Financial Accounting

Financial Statement Analysis Project

Progress Report

Our Two Companies: _____________________________________________________

Group Leader: _____________________________________________________

Briefly discuss below the progress that has been made on this project so far.

§ What sections are completed?

§ What sections are group members still working on?

§ Have you been in touch with all the group members?

§ Are they submitting work on-time?

§ Do the group members have all the materials they need to complete their work?

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