understanding financial reports

Review the financial statements of Merck and Novartis to learn additional information. The emphasis of this Case is to review the income statement, balance sheet and computation of ratios.

Review the financial statements for the companies and answer the following questions for the last reporting year:

Balance Sheet

• What components of stockholders’ equity does each of the companies disclose?

• Does the companies have preferred stock shares outstanding? If so, what special features do these shares contain?

• Does either of the companies report treasury shares? If so, do the companies disclose the reason for reacquiring the shares?

Income Statement

• What are the basic and diluted earnings per share for each company?

• Have the companies reported any discontinued operations?

• Do the companies disclose any stock compensation plans? If so, are they reporting such plans under the fair value or intrinsic value methods? What was the value of compensation expense measured for any outstanding stock option plans?

Financial Ratios

Compute the following ratios. Also, interpret and assess each group of ratios for the company. What type of story are the ratios telling the analyst?

• Profitability ratios:

? Gross profit margin

? Net profit margin

? Return on stockholders’ equity

• Liquidity ratios:

? Current ratio

? Quick ratio

? Inventory turnover

• Leverage ratios:

? Debt-to-assets

? Debt-to-equity

? Times-covered ratio

What type of information do you find in footnotes to the financial statements?

Do you find the balance sheet, income statement or other measures such as ratios the most informative? Comment on the advantages and disadvantages of using ratios for analysis.

Modular Case Assignment Expectations

It is important to answer the questions as posed. The discussion should be from 3 to 5 pages and written in a clear and concise manner. Support your discussion with references in APA format. You are encouraged to use Excel or other compatible spreadsheet when computations are involved.

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