Question Details

[solution] »

Hello,

Anyone love analyzing financial statements and calculating ratios??? I am having som


Description

Answer Download


The Question

Hello,

Anyone love analyzing financial statements and calculating ratios??? I am having some difficulty calculating and analyzing the ROE with the DuPont method. Can someone help?I have included my current calculations for the companies as well as the paper that goes along with it. At the end of the paper, in the appendices, is where the financials are located. 

I've been at it for awhile now, but formulas and financial statements are a bit overwhelming!


RUNNING HEAD: Financial Statement Interpretation

 

1 Financial Statement Interpretation 1 Financial Statement Interpretation 2 Financial Statement Interpretation

 

Financial statement interpretation can be used for a variety of reasons from investors

 

buying stock to projecting next year?s sales. The analysis can be used across industries including

 

service, retail, and manufacturing. A variety of ratios can be found with financial statements to

 

show the stance of the company such as the current ratio, quick ratio, net profit margin, asset

 

utilization, financial leverage, and return on equity. Along with the variety of ratios, there is a

 

basis accounting must adhere to outlined with the IASB and FASB/GAAP. The three companies

 

discussed in this paper Alliance Data, Carrefour, and Procter and Gamble have differences and

 

possibly similarities for their strategies in managing their working capital. Lastly, the stance

 

companies would have from their given ratios will allow an understanding of how the variances

 

in the industries will correlate to differences in ratios.

 

Differences between Industries

 

There is a vast array of differences between the service, retail, and manufacturing

 

industries. Alliance Data is a service industry company located within the United States.

 

Alliance will not contain an inventory due to the service offered by the company such as card

 

services or additional services such as marketing. An advantage Alliance has is that they will not

 

have to create the service without a customer requiring the service. Additionally the location of

 

their company may not play a huge factor, however the skill set of their employee may be

 

specialized for their services. Finally the profit difference for a service industry earns their

 

revenue from offering their services. Financial Statement Interpretation 3 Carrefour is a multinational retail company coming in as the second largest retail group in

 

the world. Carrefour has a variety of differences from the service industry. Rather than a service

 

to sell Carrefour purchases their inventory from the manufacturer leading to needing a location

 

central to their customers. The skill set of their employees could be trainable. A retail company

 

such as Carrefour would make their earnings from selling the inventory they have on hand

 

purchased through wholesale to consumers with a markup to cover their costs.

 

The manufacturing industry has differences as well. Procter and Gamble begin by

 

converting raw materials purchased through suppliers into a product that they sell to a retail

 

company. Ergo P&G will have to maintain an inventory. The location of the manufacturing

 

plants can vary but will remain within a general location to distribution centers to allow for

 

cheaper and faster shipping. Labor would be able to be trained with some specialties throughout

 

the businesses. Although there are differences between the industries each can remain profitable

 

and be compared by measurements.

 

Different Measurement Conventions & How this Affects Presentations

 

Financial Statements address two matters; the general considerations underlying financial

 

statements, and the construction and content of financial statements. The essential accounting

 

concepts that must be followed are a reasonable presentation, additions, and evenness.

 

Fair representation refers to a few concepts. Maintaining compliance with IASs can go a

 

long way in the direction of accomplishing reasonable presentation. Disclosure beyond IASs

 

necessary if that can lead to a fair presentation. Finally, where no IASs exist then, a fair

 

presentation can be achieved by following enterprise stated accounting policies to provide

 

relevant, reliable, comparable and understandable information. Along with reasonable Financial Statement Interpretation 4 representation, there are a few growing concerns. The growing concerns of assumption are that a

 

company will continue existence for the conceivable future. Additionally, the administration

 

should review the state of enterprise from time to time.

 

Accruals and consistency bring to light a few concepts each. Accruals start with a basis

 

of accounting means that liability, expenses assets, equity, income are recognized when they

 

transpire and not when cash or its equal is or paid. The basis is defined so as to consist of

 

matching. Additionally, the matching concept is the costs in which must be set off in

 

contradiction of proceeds they have contributed. Consistency refers to the presentation and

 

arrangement of objects in the financial statements must be reimbursed using two concepts. A

 

substantial change in the operation of the business or an analysis of its financial statements

 

reveals that additional material is provided by offering objects in a different method or the new

 

IAS requires a change.

 

Liabilities and Assets must not be offset unless this is allowed or required by an IAS. Income

 

and expense items should not be compensated unless allowed or required by an IAS, or unless

 

the amounts involved are not material. Both are referred to as offsetting. Then there is

 

Materiality and aggregation which IAS1 requires similar items to be aggregated together, but

 

information that is material should not be aggregated with other items.

 

Finally, the usefulness of these conventions can provide principles for situations. The

 

conventions are of some help in dealing with unusual transactions or situations as they provide

 

some principles which can be applied to a particular transaction. They can help a user of

 

accounting information to understand detailed accounting entries ("Accounting," 2017).

 

Contrast IASB Basis for Accounting (IFRS) & FASB/GAAP Accounting Financial Statement Interpretation 5 The Financial Accounting Standards Board (FASB) makes it a top priority to improve the

 

process of financial reporting. The process is enhanced by creating standards that provide clear

 

and useful information that is relevant to the needs of investors and shareholders. FASB is

 

recognized by the Securities and Exchange Commission (SEC) as the designated accounting

 

standard setter for public companies. FASB operates as an independent, private-sector not-forprofit organization responsible for the establishment of financial, accounting, and reporting

 

standards for both private and public companies as well as not-for?profit agencies that follow the

 

Generally Accepted Accounting Principles (GAAP) (About the FASB, n.d.). The GAAP are ?a

 

group of accounting standards widely accepted as appropriate to the field of accounting

 

necessary, so financial statements are meaningful across a wide variety of businesses and

 

industries? (Accounting Standard, n.d.). These standards are used as guidelines by companies

 

preparing and presenting financial statements and information such as income, expenses, assets,

 

liabilities, etc. (Accounting Standards, n.d.).

 

Utilized in more than 110 countries, the IFRS Foundation focuses on governance and

 

oversight and operations. As an independent, not-for-profit organization, IFRS is a service to the

 

interest of the public by setting IFRS Standards by the International Accounting Standards Board

 

to be used by publicly accountable companies. The mission of IFRS is to develop standards that

 

satisfy the following criteria such as transparency is increased through enhancement of

 

international comparability and quality of financial information provided to investors

 

participating in the financial decision-making process. Accountability is improved through the

 

reduction of the gap between businesses and individuals entrusted with the money. Finally,

 

efficiency can be enhanced through investors identifying both opportunities and risks that will

 

improve the transfer of capital. Financial Statement Interpretation 6 Additionally, there are notable differences between IFRS and GAAP with the biggest

 

difference surrounding the rules that are followed by the two methods. GAAP follows a more

 

rule-based platform, where IFRS follows a principle route allowing for the potential of different

 

interpretations, and a better representation of the economics of a transaction. This difference may

 

lead to additional disclosures included in financial statements and might allow for fewer

 

exceptions than the Rules-based system followed by the GAAP (GAAP vs. IFRS, n.d.).

 

Investopedia highlights a few more differences between the methods including how inventory

 

costs are handled, as well as intangibles and write-downs. Intangible assets such as research and

 

development are only recorded under IFRS if it has the potential to accumulate economic benefit

 

or measured value, the GAAP on the other hand, recognizes these transactions at fair value.

 

Inventory costs such as LIFO are not allowed under the IFRS method, where the GAAP method

 

allows for LIFO and FIFO to track inventories. Finally, Inventories under IFRS can be reversed

 

in the future, whenever specified criteria are satisfied. Under the GAAP method, reversals are

 

prohibited. (Nguyen, n.d.).

 

Strategies for Managing Working Capital

 

Working capital management refers to a company?s managerial accounting strategy

 

designed to monitor and utilize the two components of working capital, current assets, and

 

current liabilities, to ensure the most financially efficient operation of the company. The primary

 

purpose of working capital management is to ensure the business maintains enough cash flow to

 

meet its short-term operating costs and short-term debt obligations (Investopedia). Net operating

 

capital captures multiple dimensions of firms? adjustments to operating and financial conditions.

 

Sales growth, an uncertainty of sales, costly external financing, and financial distress encourage

 

companies to pursue more aggressive working capital strategies (Highfield, Hill, & Kelly, 2010). Financial Statement Interpretation 7 Correlation has been found to show the quicker an account is paid; the better working capital is

 

managed and higher profitability results (Bigger, Gill, Mathur). Each of the three companies

 

Procter & Gamble, Alliance Data, and Carrefour all have unique strategies for how they manage

 

their working capital.

 

Procter & Gamble?s strategy for managing its working capital falls under the triangular

 

structure of being technical. This company very firmly relies on accuracy and honesty by

 

producing reliable and accurate reports to management, shareholders, creditors, government

 

entities, and all others. All of the managerial reporting of the working capital must be exact and

 

have accurate documentation and ethical evaluation/appraisal (P & G Our Values and Policies,

 

18-20). It is a financial requirement that all Procter & Gamble operations must comply with all

 

local and national laws relating to the accurate and complete maintenance of financial books and

 

records. Open innovation is allowing for the facilitation of financial information to be easier to

 

be communicated among top executives (Dodgson, Gann, & Salter, 2006). Procter & Gamble

 

sets a high level of internal controls for working capital by having company assets safeguarded,

 

financial reporting reflects actual business activity by complying with legal requirements, and

 

business operations are efficient and effective.

 

Next, is Alliance Data Systems in the service industry where they issue credit cards to a

 

wide variety of retailers. Their approach to managing their working capital is aggressive as their

 

aim is to maximize profits while also taking risks as they are also in the banking industry as 2/3

 

of revenue generated is from banking. The complete focus of their net working capital strategy is

 

to make a profit as they have a strong free cash flow of $1.3 billion in 2015 that is used to

 

repurchase stock to support the business growth (Alliance Data Systems 4-11). In some of the

 

credit cards, they issue to retailers; they do not offer an auto pay feature enabling Alliance Data Financial Statement Interpretation 8 Systems to earn a higher ROE from late fees charged. Lastly, this firm allows consumers to be

 

approved for a credit card at a higher interest rate and in turn never having a credit request put on

 

a customer?s records as a way to generate a higher income (Alliance Data Systems 4-11).

 

Lastly, Carrefour is a foreign retailer who sells a wide variety of products similar to that of

 

U.S. company Walmart and their strategy can be considered risky for a few reasons. First, they

 

have been maintaining a negative net working capital by being unable to meet short-term

 

liabilities with current assets. Debt-to-equity ratio has been increasing compared to other

 

competitors by financing capital using a non-interest bearing trade note and a liquidity and risk

 

ratio less than one (Akman, Irawan, Rosiana, Widya, & Wijayanto, 1-14). Carrefour?s main

 

strategy is to generate a high sales volume while maintaining a small margin as the net return is

 

about two percent. In regards to the operating activity, Carrefour kept increasing net fixed assets,

 

which was financed by short-term debt ultimately resulting in a mismatching long-term

 

investment and a short-term financing (Akman, Irawan, Rosiana, Widya, & Wijayanto, 1-14).

 

Ratios and Analysis

 

Current Ratio

 

The current ratio measures how liquid a company is and their ability to pay short term and

 

long term financial obligations (Current Ratio, 2016). The larger the current ratio, the more

 

likely a company can meet its financial commitments (Current Ratio, 2016). A current ratio of

 

less than one is an indicator the firm is in poor financial health; however, it does not indicate the

 

company will go bankrupt (Current Ratio, 2016). In table 1, P&G (.995) and Carrefour (.773)

 

both had current ratios of less than one in 2015. While they improved from 2014, the ratios

 

indicate assets are not ideally liquid. In 2014, P&G had a current ratio of .937 while Carrefour Financial Statement Interpretation 9 was at a .759. A high ratio (over three), is not necessarily an indicator of high financial status for

 

a firm either (Current Ratio, 2016). When a ratio is this high, it indicates funds are not being

 

allocated efficiently and to the right places. In 2015, Alliance Data (2.536) had a ratio above 1

 

and lower than three indicating they are allocating assets and using funds appropriately. This is

 

an improvement from 2014, when the ratio was 3.831, indicating they were not allocating their

 

funds properly.

 

Quick Ratio

 

Similar to the current ratio, the quick ratio measures liquidity. The difference is the quick

 

ratio measures the ability to pay liabilities as they are due to only quick assets that can become

 

cash in 90 days (Quick Ratio, 2016). High quick ratios are most desirable indicating the

 

company has more than enough cash on hand to pay liabilities. Alliance Data had the most

 

desirable quick ratio in 2014 and 2015 with 3.831 and 2.536 respectively. In 2014, Carrefour and

 

P&G indicated quick ratios of less than one, .489 and .737 respectively. This mirrored their

 

performance in 2015 with Carrefour reporting a quick ratio of .448 and P&G reporting .812.

 

Both companies will need a strategy to have more quick assets to convert to cash when liabilities

 

are due.

 

Net Profit Margin

 

Net profit shows what percentage of every dollar received can be converted to profit (Net

 

Profit, 2016). Low-profit margins do not necessarily indicate low profit, and can relate to the

 

budget that the company has set (Net Profit, 2016). Carrefour, P&G and Alliance Data have net

 

profit margins that are less than ideal. They reported Carrefour (1.424%) and P&G (9.365%) in Financial Statement Interpretation 10 2015 and in 2014, Carrefour (1.791%) and P&G as (14.636%). Alliance data reported 9.401%

 

and 9.733% in 2014 and 2015, respectively.

 

Asset Utilization

 

The higher the asset utilization ratio, the more efficiently the business is handling assets

 

to obtain revenue and profit (Asset Utilization, 2016). In 2015 and 2014, Carrefour reported the

 

highest asset utilization ratio of 1.748 (2015) and 1.667 (2014). P&G reported .589 (2015) and .

 

558 (2014) while Alliance Data reported .287 (2015) and .261 (2014).

 

Financial Leverage

 

The degree a company uses fixed income securities like debt and preferred equity is called

 

financial leverage (Financial Leverage, 2016). High percentages in financial leverage indicate

 

high-interest rates and negatively affect the bottom line (Financial Leverage, 2016). Carrefour

 

has the highest financial leverage showing it is the least healthy in 2015 (4.225) and 2014

 

(4.476). P&G has the lowest percentage of the three companies in 2015 (1.053) and 2014

 

(1.061). P&G is most likely to have interest rates that do not affect the bottom line. Alliance

 

Data was in the middle of these companies with 2015 (2.518) and 2014 (1.756)

 

Return on Equity (ROE)

 

The DuPont model ROE helps investors break down and gain insight into not only the

 

capital structure of an organization but the quality of the business being performed and the

 

features that are driving the investment returns. The in-depth look includes calculation of the Net

 

Profit Margin to identify after-tax profits earned for each dollar of revenue (Kennon, 2016). Financial Statement Interpretation 11

 

Conclusion To summarize, financial statements help with analyzing the balance sheet and income

 

statement of a company. These statements also help to interpret the financial ratios of a business

 

which can help with the business evaluation, financial representations and also financial

 

forecasting. For these companies to meet their financial responsibilities and to support with

 

making a calculated decision, they must formulate a financial statement. The above analysis

 

helps gain a better understanding on how essential information is gathered from prepared

 

financial statements, and how the information provided can be utilized to analyze the company?s

 

performance, compare, interpret and make further decisions based on analyzed ratios. On the

 

other hand, the information that is provided in the financial statements is not a finishing point. Financial Statement Interpretation 12

 

References (2009). Our Values and Policies [PDF file]. Retrieved from

 

(2016). Alliance Data Systems: If You Don?t Like the Answer ... Just Change the Question. [PDF]

 

About FASB. (n.d.). Retrieved from http://www.fasb.org/cs/ContentServer?

 

c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1176154526495

 

Akman, Irawan, Rosiana, Widya, & Wijayanto (2010). Case 2: Carrefour, S.A.

 

Asset Utilization (2016). Retrieved from https://www.reference.com/business-finance/assetutilization-df7db79f270ebcac#

 

Biger, N., Gill, N., Mathur, N. (2010). The Relationship Between Working Capital Management

 

And Profitability: Evidence From The United States Working Capital Management,

 

2010(10), 1-9. Business and Economics Journal.

 

Current Ratio (2016). Retrieved from http://www.investopedia.com/terms/c/currentratio.asp

 

Dodgson, M., Gann, D., Salter, A. (2006). The role of technology in the shift towards open

 

innovation: the case of Procter & Gamble. R & D Management, 36(03), 333-346.

 

Highfield, M., Hill, M., Kelly, G. (2010). Net Operating Working Capital Behavior: A First Look.

 

Financial Management, 39(2), 783-805.

 

https://www.pg.com/images/company/who_we_are/.../values_and_policies907.pdf Kennon, J. (2016). The dupont model return on equity formula for beginners. Retrieved from;

 

https://www.thebalance.com/the-dupont-model-return-on-equity-formula-for-beginners357494

 

Net Profit Margin (2016). Retrieved from http://www.investopedia.com/terms/n/net_margin.asp Financial Statement Interpretation 13 Nguyen, J. (n.d.). What are some of the key differences between IFRS and U.S. GAAP.

 

Retrieved from http://www.investopedia.com/ask/answers/09/ifrs-gaap.asp

 

Quick Ratio (2016). Retrieved from http://www.myaccountingcourse.com/financial-ratios/quickratio

 

Working Capital Management. Retrieved from

 

http://www.investopedia.com/terms/w/workingcapitalmanagement.asp Financial Statement Interpretation 14

 

Appendix A - Alliance Data Financial Statement Interpretation 15 Financial Statement Interpretation 16 Financial Statement Interpretation 17

 

Appendix B ? Carrefour Financial Statement Interpretation 18 Financial Statement Interpretation 19 Financial Statement Interpretation 20 Financial Statement Interpretation 21

 

Appendix C - P&G Financial Statement Interpretation 22 Financial Statement Interpretation 23 Financial Statement Interpretation 24 Financial Statement Interpretation 25

 

Appendix D - Tables Table 1

 

Calculations for Companies

 

Calculations Formula P&G

 

( InThousands)

 

2015

 

2014 Alliance Data (In

 

Thousands)

 

2015

 

2014 Carrefour (In

 

Thousands)

 

2015

 

2014 Current

 

Assets/Current

 

Current Ratio Liabilities

 

0.995 0.937

 

2.5360

 

3.8310

 

0.773

 

(Current AssetsInventories)/Curre

 

Quick Ratio

 

nt Liabilities

 

0.812 0.737

 

2.536

 

3.831

 

0.448

 

Net Profit

 

(Net Income/Total

 

Margin

 

Sales)*100

 

9.365 14.636

 

9.401

 

9.733

 

1.424

 

Sales or

 

Asset

 

Revenues/Total

 

Utilization

 

Assets

 

0.589 0.558

 

0.287

 

0.261

 

1.748

 

Financial

 

Total Debt/Total

 

Leverage

 

Equity

 

1.053 1.061

 

2.518

 

1.756

 

4.225

 

Note. Annual Reports from all 3 companies were used to calculate financial statistics 0.759

 

0.489

 

1.791

 

1.667

 

4.476

 


Solution details

Solution #000176111

[solution] »

Hello,

Anyone love analyzing financial statements and calculating ratios??? I am having som.zip

Uploaded by: Tutor

Answer rating:

This paper was answered on 14-Oct-2020

Pay using PayPal (No PayPal account Required) or your credit card . All your purchases are securely protected by .

About this Question

STATUS

Answered

QUALITY

Approved

DATE ANSWERED

Oct 14, 2020

EXPERT

Tutor

ANSWER RATING

BEST TUTORS

We have top-notch tutors who can do your essay/homework for you at a reasonable cost and then you can simply use that essay as a template to build your own arguments.

You can also use these solutions:

  • As a reference for in-depth understanding of the subject.
  • As a source of ideas / reasoning for your own research (if properly referenced)
  • For editing and paraphrasing (check your institution's definition of plagiarism and recommended paraphrase).
This we believe is a better way of understanding a problem and makes use of the efficiency of time of the student.

STUCK WITH YOUR PAPER?

Order New Solution. Quick Turnaround

Click on the button below in order to Order for a New, Original and High-Quality Essay Solutions. New orders are original solutions and precise to your writing instruction requirements. Place a New Order using the button below.

WE GUARANTEE, THAT YOUR PAPER WILL BE WRITTEN FROM SCRATCH AND WITHIN A DEADLINE.

Order Now