Financial Statement Analysis

Financial Statement Analysis
In order to analyze the company’s financial position, it is necessary to calculate its main financial ratios, and compare those to the ratios common for the same industry and country. The aim of this essay is to choose three companies: one from manufacturing, one from service and one from retail sales; among these, one company has to be foreign. I have chosen 3M Company in manufacturing sphere, PUBLIX Super Markets Inc. in retail area and foreign company Fujitsu Limited from the scope of service companies.

For these companies, it is necessary to calculate such ratios as current and quick liquidity ratios, the DuPont ratio (also called the return on equity), gross profit margin, asset utilization ratios (receivables and inventory turnover were selected for this category) and financial leverage ratios (represented by debt ratio and debt-to-equity ratio).

Liquidity ratios indicate the ability of the company to maintain its short-term financial obligations (Fabozzi & Drake, 2009). Current ratio is calculated as current assets divided by current liabilities; quick ratio is obtained by dividing the difference of current assets and inventory to liabilities. The DuPont ratio shows the earnings of the company compared to the amount of common stock investment and is calculated as net income divided by shareholders’ equity. Gross profit margin shows the company’s financial health and shows the part of finance that is left after deducting cost of revenue (Nikolai & Bazley & Jefferson, 2009). Gross profit margin is calculated as revenue minus cost of revenue, and that value is divided by revenue. In general, a higher profit margin shows greater efficiency of the company (Nikolai & Bazley & Jefferson, 2009).

Primary measures of asset utilization are receivables turnover, i.e. the figure showing how quickly the company collects its accounts receivables, and inventory turnover, which shows how quickly the company’s inventory is sold and replaced (Fabozzi & Drake, 2009). Receivables turnover is calculated as annual sales divided by account receivable; inventory turnover is obtained by dividing cost of revenue to inventory. Finally, financial leverage ratios indicate the long-term solvency of the company (Nikolai & Bazley & Jefferson, 2009). The main of them are debt ratio, calculated as total debt divided by total assets, and debt-to-equity ratio, calculated by dividing total debt to total equity.

After reviewing the financial essence of financial ratios, it is possible to determine the data which would be needed to calculate these ratios. For every chosen company, it is necessary to find in its financial statements such values as current assets and liabilities, total assets, inventory, net income, accounts receivable, net income, revenue and cost of revenue, shareholders’ equity. Using these values, the above-mentioned financial ratios may be calculated. All values are given by the end of year 2009 (finance.google.com). Initial data and results of calculation are shown in Table 1.

Financial Statement Analysis


There exist different bodies for determining the generally accepted principles, conventions and standards of accounting. In the USA, the United States Financial Accounting Standards Board (FASB) determines standards; the International Accounting Standards Board does the same internationally. The main conventions of FASB are recognition, matching and cost recovery, and stable monetary unit. For IASB, the conventions are more complicated: it uses a six step process of considering the standards, since the changes in IASB conventions result in changes for any country. The IASB includes 15 members from 9 countries who take part in determining international standards and principles of accounting (Warren, 2008). Both boards are operating to create a set of standards that are concise and clear.

Currently, the agreement between FASB and IASB is that the accountants are using both standards, and the goal is to evaluate which of the standards is more efficient and concise; in case one of the standards appears to be more appropriate, it will be accepted by both boards, and if there is no evident “winner”, the boards will start a joint project on determining global standard. Currently, since the boards did not reach a complete agreement, companies operating internationally have to comply with both standards, and this creates ambiguity in presenting financial results.

Also, differences are created by using different bases of the accounting, accrual or cash basis. When accrual basis for accounting is used, actions are recorded in the fiscal period when they appeared, i.e. revenues are reported at the time when they are earned, and expenses are recorded also at the time when they incurred (Warren, 2008). In accounting using cash basis, actions are recorded when they actually happen: revenues are recorded when cash is received, and expenses are recorded at payment time. In general, accrual basis is used by large companies, and cash basis is used by smaller businesses (Warren, 2008). However, this difference in presenting financial results makes it difficult to compare financial results, and should be taken into account, when analyzing the companies’ financial efficiency.

References

Fabozzi, Frank A. & Drake, Pamela Peterson. (2009). Finance: capital markets, financial management, and investment management. John Wiley and Sons.
Nikolai, Loren A. & Bazley, John & Jones, Jefferson P. (2009). Intermediate Accounting. Cengage Learning.
Warren, Carl S. (2008). Survey of Accounting. Cengage Learning.
Finance.google.com. Accessed at September 11, 2010.

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