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

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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




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


Asset Utilization (2016). Retrieved from


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


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. Kennon, J. (2016). The dupont model return on equity formula for beginners. Retrieved from;


Net Profit Margin (2016). Retrieved from Financial Statement Interpretation 13 Nguyen, J. (n.d.). What are some of the key differences between IFRS and U.S. GAAP.


Retrieved from


Quick Ratio (2016). Retrieved from


Working Capital Management. Retrieved from 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)




2014 Alliance Data (In






2014 Carrefour (In






2014 Current




Current Ratio Liabilities


0.995 0.937








(Current AssetsInventories)/Curre


Quick Ratio


nt Liabilities


0.812 0.737








Net Profit


(Net Income/Total






9.365 14.636








Sales or










0.589 0.558










Total Debt/Total






1.053 1.061








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










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