ACCT603 Corporate Accounting

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FACULTY OF LAW AND BUSINESS
Peter Faber Business School
North Sydney Semester 2 2017
ACCT603 Corporate Accounting
Group Assignment
Due date :
Parts A and B: 23.59AEDST, 15 October 2017 and
Part C: 23.59AEDST, 29 October 2017
Weighting : 30%

Group Project: Part A
Consult the financial statements for your company. Include a link to the financial statements in your report. Calculate the following financial ratios for the last three fiscal years. Eventually, you will compare this to your counterpart in Australia.
Year (________) Year (________) Year (________)
Current ratio
Acid test ratio
Cash ratio
Accruals ratio
Cash Flow Yield
Cash Flow to Sales
Cash Flow to Assets
Current Cash Debt Coverage Ratio
Free Cash Flow
Accounts receivable turnover
Days’ sales outstanding
Accounts payable turnover
Days’ payable outstanding
Inventory turnover
Days’ sales in inventory
Cash Turnover
Fixed Asset Turnover
Total Asset Turnover
Cash Conversion Cycle
Basic Defense Interval
Expense Coverage Days
Debt
Equity
Debt to Equity
Times Interest Earned
Cash Interest Coverage
Cash Debt Coverage
Interest Expense to Total Debt
Financial Leverage
Gross Profit Margin
Operating Profit Margin
Pre-Tax Profit Margin
Net Profit Margin
Return on Total Assets
Return on Common Equity
Book Value for Common Share
Market Capitalization
Effective Tax Rate
Basic Earnings per Share
Price-Earnings
Price-Sales
Price-Book
Dividend Payout
Dividend Yield
Dividend Coverage
Current liability ratio
Inventory to Sales Ratio
Cash to Current Assets Ratio
Current Assets to Total Debt Ratio
Current Liabilities to Inventory Ratio
Top compensation to sales
RATIOS
LIQUIDITY AND ACTIVIY
Current Ratio measures the ability of a firm to pay its short-term debts. The formula is:
Current Assets
Current Ratio =
Current Liabilities
Quick (Acid-Test) Ratio measures the immediate ability of a firm to pay its short-term debts. The formula is:
Cash + Marketable Securities + Current
Current Ratio = Receivables
Current Liabilities
Cash Ratio measures short-term liquidity in the strictest sense. The formula is:
Cash + Marketable Securities
Cash Ratio =
Current Liabilities
Accruals Ratio measures the amount of accounts receivables to cover the accounts payable. The formula is:
Accounts Receivables
Accruals Ratio =
Accounts Payables
Cash Flow Yield measures ability to generate operating cash flows in relation to NI (the most important liquidity ratio). The formula is:
Net cash provided by
Cash Flow Yield = operating activities
NI
Cash Flow to Sales measures the ability of sales to generate operating cash flows. The formula is:
Net cash provided by
Cash Flow to Sales = operating activities
Net Sales or Net Revenues
Cash Flow to Assets measures the ability of assets to generate operating cash flows. The formula is:
Net cash provided by
Cash Flow to Assets = operating activities
Average Total Assets
Current Cash Debt Coverage Ratio measures a company’s ability to pay off its current liabilities from its operations. The formula is:
Net cash provided by
Current Cash Debt Coverage Ratio = operating activities
Average Current Liabilities
Free Cash Flow measures the amount of discretionary cash flow after providing for commitments. The formula
is:
Net cash provided by
Free Cash Flow = operating activities – Capital Expenditures – Dividends
Accounts Receivable Turnover measures the number of times, on average, the company collects receivables in the period. The formula is:
Net Sales or Net Revenues
Accounts Receivable Turnover =
Average Accounts Receivable
Days’ Sales Outstanding measures days required to collect receivables from customers. The formula is:
Ending Accounts Receivable X 365 days
Days’ Sales Outstanding =
Net Sales or Net Revenues
Inventory Turnover measures the number of times, on average, the company sells inventory in the period. The formula is:
Cost of Goods Sold
Inventory Turnover =
Average Inventory
Days’ Sales in Inventory measures days required to sell inventory. The formula is:
Ending Inventory X 365 days
Days’ Inventory Outstanding =
Cost of Goods Sold
Accounts Payable Turnover measures the number of times, on average, the company pays payables in the period. The formula is:
Cost of Goods Sold
Accounts Payable Turnover =
Average Accounts Payable
Days’ Payable Outstanding measures days required to pay suppliers. The formula is:
Ending Accounts Payable X 365 days
Days Payable Outstanding =
Cost of Goods Sold
Fixed Asset Turnover measures firm’s ability to generate net sales from fixed-assets – specifically PP&E – net of depreciation. The formula is:
Net Sales or Net Revenues
Fixed Asset Turnover =
Average Net PP&E
Total Asset Turnover measures a firm’s efficiency in using its assets in producing sales. The formula is:
Net Sales or Net Revenues
Total Asset Turnover =
Average Total Assets
Cash Conversion Cycle measures number days between disbursing cash and collecting cash. The formula is:
Days Sales Outstanding + Days Inventory
Cash Conversion Cycle =
Outstanding – Days Payable Outstanding
Basic Defense Interval measures number of days a firm can pay its cash expenses without additional funding.
The formula is:
Cash and Cash Equivalents + Accounts
Receivable + Marketable Securities
Basic Defense Interval =
(Operating Expenses + Interest Expense + Income Tax Expense) / 365
Expense Coverage Days estimates number of days a company can pay for its business operations with cash and liquid assets. The formula is:
Cash and Cash Equivalents + Accounts
Receivable + Marketable Securities
Expense Coverage Days =
(Operating Expenses + Cost of Goods Sold + Interest Expense) / 365
Current liability ratio measures the proportion of total liabilities that are due within a year. The formula is:
Current Liabilities Total Liabilities
Current Liabilities Ratio =
Cash turnover measures how effective a company is utilizing its cash. The formula is:
Net Sales Average Cash
Cash Turnover =
Inventory to Sales Ratio measures percentage of inventory the company has on hand to support the current amount of sales. The formula is:
Ending Inventory Net Sales
Inventory to Sales =
Cash to Current Assets Ratio measures a company’s liquidity based on its cash and marketable securities alone. The formula is:
Cash + Marketable Securities
Cash to Current Assets Ratio =
Total Current Assets
Current Assets to Total Debt Ratio measures the company’s ability to cover its total debt with its current assets. The formula is:
Total Current Assets
Current Assets to Total Debt Ratio =
Long-Term Debt + Short-Term Debt
Current Liabilities to Inventory Ratio measures how much company relies on selling inventory to pay current obligations. The formula is:
Current Liabilities Ending Inventory
Current Liabilities to Inventory Ratio =
SOLVENCY (COVERAGE)
Debt Ratio measures the percentage of total assets provided by creditors. The formula is:
Total Liabilities Total Assets
Debt Ratio =
Equity Ratio measures the percentage of total assets provided by stockholders. The formula is:
Total Equity Total Assets
Equity Ratio =
Debt to Equity Ratio measures debt versus equity financing. The formula is:
Total Liabilities Total Equity
Debt to Equity Ratio =
Times Interest Earned/Interest Coverage measures ability to meet interest payments as they come due. The formula is:
Times Interest Earned/Interest EBIT
=
Coverage Interest Expense
Cash Interest Coverage measures how many times interest payments are covered by CFO. The formula is:
CFO + Interest Paid + Taxes Paid
Cash Interest Coverage =
Interest Paid
Cash Debt Coverage Ratio measures a company’s ability to pay off its total liabilities from its operations. The formula is:
Net cash provided by
Cash Debt Coverage Ratio = operating activities
Average Total Liabilities
Interest Expense to Total Debt Ratio measures the estimated interest rate the company is paying on its total debt. The formula is:
Interest Expense
Interest Expense to Total Debt Ratio =
Short-Term Debt + Long-Term Debt
Financial Leverage Index measures how well a company is utilizing its debt. The formula is:
Return on Equity
Financial Leverage Index = (Net income + interest expense (1-tax rate))/
Total assets
PROFITABILTY
Gross Margin Ratio measures gross margin generated by each dollar of sales. The formula is:
Gross Margin
Gross Margin Ratio =
Net Sales or Net Revenues
Operating Margin Ratio measures operating margin generated by each dollar of sales. The formula is:
NOI
Operating Margin Ratio =
Net Sales or Net Revenues
Pre-Tax Margin Ratio measures pre-tax (after interest, before taxes) margin generated by each dollar of sales.
The formula is:
EBT
Pre-Tax Margin Ratio =
Net Sales or Net Revenues
Net Margin Ratio measures net margin generated by each dollar of sales. The formula is:
NI
Net Margin Ratio =
Net Sales or Net Revenues
Return on Total Assets measures overall profitability of assets. The formula is:
NI
Return on Total Assets =
Average Total Assets
Return on Common Equity measures profitability of owners’ investment. The formula is:
Return on Common Equity = NI – Preferred Dividends
Average Common Equity
Earnings per Share measures net income earned on each share of common stock. The formula is:
Earnings per Share = NI – Preferred Dividends
Weighted-average Common Shares Outstanding
Book Value per Common Share measures amount each share would receive if firm liquidated at amounts on balance sheet. The formula is:
Book Value per Common Share = Common Stockholder’s Equity
# Common Shares Outstanding
Dividend Payout Ratio measures the percentage of earnings distributed in the form of cash dividends. The formula is:
Cash dividends/Average Shares Outstanding
Dividend Payout Ratio =
Net income/Average Shares Outstanding
Effective Tax Rate measures the percentage the company recognizes as tax expense relative to EBIT. The formula is:
Income Taxes
Effective Tax Rate =
EBIT
Top compensation to sales measures how much of the sales goes to paying executives and board members. The formula is:
Officers + Directors Compensation
Total Compensation to Sales =
Net Sales
MARKET
Market Capitalization – measures the size of a firm. The formula is: Market Capitalization = Share Price x Number of Shares Outstanding
Price-Earnings Ratio measures the ratio of the market price per share to earnings per share. The formula is:
Market Price per Share Earnings per Share
Price-Earnings Ratio =
Price-Sales Ratio measures how well a company is performing compared to similar companies. The formula is:
Market Capitalization Total Revenue
Price-Sales Ratio =
Price-Book Ratio measures how well a company is performing compared to similar companies. The formula is:
Market Price per Share Book Value per Share
Price-Book Ratio =
Dividend Yield Ratio measures the cash return per common share. The formula is:
Cash dividends/Average Shares Outstanding
Dividend Yield Ratio =
Market Price per Share
Dividend Coverage Ratio measures the number of times earnings covers the dividend payout. The formula is:
Earnings per Share
Dividend Coverage Ratio =
Cash dividends/Average Shares Outstanding

Group Project Part B
Complete the following three components of a financial statement analysis for the last three fiscal years. Eventually, you will compare this to your counterpart in Australia.
1) Complete a horizontal analysis using dollar and percent change for the following items for the last three years: (use the following columns: two years ago (A), last year (B), current year (C), $ change (C-B), $ change (C-A), % change (C-B), and % change (C-A).
a) Cash
b) Total Current Assets
c) Total Assets
d) Total Current Liabilities
e) Total Liabilities
f) Retained Earnings
g) Total Stockholders’ Equity
h) Number of Shares Outstanding
i) Net Sales/Revenues
j) Cost of Goods Sold
k) Gross Margin
l) Operating Expenses
m) Operating Margin
n) Interest Expense
o) Net Income
p) Earnings Per Share
q) Executive Compensation
2) Complete a trend analysis for items in #2 for the last three years using the earliest year as the base.
3) Complete a vertical analysis for the last three years balance sheets and income statements.
GLE Group Project Part C Your Names _________________________________________________________________________ Company Names ______________________________________________________________________ Industry _________________________________________ Year(s) of Statements ________________
Report Format: double-spaced, one inch margins, using a 12-point Times New Roman font.
1) Write a summary of each company and include:
a) A link to the annual report/financial statements for both firms for the latest fiscal year from the firms’ website or the SEC website.
b) What the firms included in their annual reports that are particularly important to understanding the company’s prospects?
c) a brief historical summary of each company
d) recent developments within the companies and the industry
e) the future direction of each company and industry
f) each company’s position within the industry
g) each company’s recent stock chart and your expectation for the next year
h) a list of other competitors
i) other items of significance to the companies including any trends in operations or capital resources
Insert the following building blocks for your analysis for each of the firms. This should be completed in an Excel workbook, with each part in a separate tab.
2) Complete a ratio analysis for the last three years. Round to 4 decimal places. If a ratio does not apply, write N/A.
3) Complete a horizontal analysis using dollar and percent change for the following items for the last three years: (use the following columns: two years ago (A), last year (B), current year (C), $ change (C-B), $ change (C-A), % change (C-B), and % change (C-A).
r) Cash
s) Total Current Assets
t) Total Assets
u) Total Current Liabilities
v) Total Liabilities
w) Retained Earnings
x) Total Stockholders’ Equity
y) Number of Shares Outstanding
z) Net Sales/Revenues aa) Cost of Goods Sold bb) Gross Margin cc) Operating Expenses dd) Operating Margin ee) Interest Expense ff) Net Income gg) Earnings Per Share
hh) Executive Compensation
4) Complete a trend analysis for items in #2 for the last three years using the earliest year as the base.
5) Complete a vertical analysis for the last three years balance sheets and income statements.
For the next part, you are expected to integrate your conclusions from the analyses above, however this is not to be your only source of information. You may use news articles or financial analyst reports about the companies to support your viewpoints. Provide a citation list for any sources used.
6) Complete a financial statement analysis of the two firms. Evaluate the horizontal, vertical, and trend results. Discuss the ratios, addressing the profitability and total asset management, liquidity, solvency and financial risk, efficiency and operating asset management, and market strength. Highlight any significant changes including whether the company’s situation has deteriorated or improved with respect to the various categories. Comment on the relative performance of the company to each other and to other companies in
the industry. To conduct the broader industry analysis, use the industry statistics reported on www.bizstats.com. Use the ratios to answer the following questions with explanations. Write your responses to each question in Appendix A and then integrate them into a written piece rather than answering each question in a list.
You MUST address how any differences in the accounting standards between IFRS and US GAAP could impact the comparison of the two firms.
a) Is the company paying its accounts payable more or less rapidly over time? Is the company’s use of accounts payable decreasing or increasing?
b) Is the company collecting its accounts receivable more or less rapidly over time? Is the company’s investment in accounts receivable decreasing or increasing?
c) Is the company converting its inventory more or less rapidly over time? Is the company’s investment in inventory decreasing or increasing?
d) Is the company converting its resource inputs into cash flows more or less rapidly over time? Is the company’s cash position decreasing or increasing?
e) Is the company’s investment in fixed assets increasing or decreasing?
f) Is the company managing its assets efficiently? Is it managing them more or less efficiently?
g) Is the company’s use of long term debt increasing or decreasing?
h) Is the company utilizing its debt efficiently? Is it utilizing it more or less efficiently?
i) Is the stockholder’s investment becoming more or less profitable?
j) Did the dollar amount/percentage of operating revenues increase or decrease over time?
k) Did the dollar amount/percentage of operating expenses increase or decrease over time?
l) Did the market capitalization increase or decrease significantly over time?
m) Did the times interest earned increase or decrease over time?
n) Did the dividend yield and dividend payout increase or decrease over time?
o) Did the effective tax rate increase or decrease over time?
p) Did the estimated interest rate increase or decrease over time?
q) Did the free cash flow increase or decrease over time?
r) Did the earnings per share increase or decrease over time?
s) Did the book value per share increase or decrease over time?
t) Did the price-earnings ratio increase or decrease over time?
u) What are the trends in the various ratios of firm profitability?
v) What are the trends in the various ratios of firm liquidity?
w) What are the trends in the various ratios of firm efficiency (activity)?
x) What are the trends in the various ratios of firm solvency (coverage)?
y) What are the trends in the various market ratios?
z) Are there differences in accounting methods that could be taken into account when making comparisons between the firms and with the industry?
7) Short-Term Credit Decision: In no more than one typed page, provide a statement of your decision to lend or not lend to each firm based on your interpretation of their short-term prospects. Analyze this as you would if you were considering lending $1 billion of your own money to the firms to be repaid in 90 days. Essentially, you are answering whether you believe the firm is able to meet current obligations and to use current assets efficiently to produce profits. Comment on their success in employing operating leverage. Make sure to address the following: short-term viability, short-term growth, cash flow, working capital, efficiency, and liquidity.
8) Long Term Credit Decision: In no more than one typed page, provide a statement of your decision to lend or not lend to each firm based on your interpretation of their long-term prospects. Analyze this as you would if you were considering lending $10 billion of your own money to the firms to be repaid in 10 years. Essentially, you are answering whether you believe the firm is able to meet long-term liabilities, to use long-term debt and stockholder’s equity effectively without jeopardizing the firm’s future, and to manage long-term assets in a way that will maximize revenues. Comment on their success in employing financial leverage. Make sure to address the following: long-term viability, long-term growth, the need for future financing, the sources for payment of interest and principal, the cushion the firm has in earnings and cash flows to pay interest and principal, the volatility (unpredictability) in the firm’s earnings and cash flows, the likelihood the company will file for bankruptcy, and the financial strength to pay debts in a period of poor profitability.
9) Investment Decision: In no more than one typed page, provide a statement of your decision to invest in the stock of one of the firms based on your interpretation of its long-term prospects. Analyze this as you would if you were considering investing $500 million of your own money in the stock. Address the following: the company’s future business prospects, the company’s future market prospects, the company’s competitive strengths and weaknesses, the company’s strategic initiatives in response to business opportunities and threats, the company’s current earnings performance, the company’s future earnings potential and the sustainability of its current earnings, the company’s current financial condition, the risks and rewards of the company’s financing structure, the company’s vulnerability to earnings variability, and the company’s financial strength to overcome a period of poor profitability. Be sure to provide a conclusion based on why you decided to invest in this company’s stock over the other company’s stock.
10) Employment Decision: In no more than one typed page, provide a statement of your decision to become CFO in one of the firms based on your interpretation of all the facts presented. Assume that you have gotten an offer from both firms. It includes a base salary of $20 million, a bonus tied to the accounting profits of the firm, a bonus tied to the stock price of the firm, stock option grants, restricted stick grants, stock appreciation rights, benefits, and perks. Financial statement analysis from the standpoint of management relates to all of the questions raised by creditors and investors because these user groups must be satisfied for the firm to obtain capital as needed. Management must also consider its employees, the general public, regulators, and the financial press. Look to the analyses and address: how well has the firm performed and why, what changes should be implemented to improve future performance, what operating areas have contributed to success and which have not, the strengths and weaknesses of the company’s financial position, and the issues that might arise with respect to the public, labor, regulators, customers, creditors, and investors that might be important. Be sure to provide a conclusion based on why you decided to become CFO at one firm over the other.
11) Consulting Decision: In no more than one typed page, provide a statement as if you were a hired consultant presenting to the CEO for both firms, what would be your future strategies, goals and objectives for this company? And how would you reflect these through the preparation of annual operating budgets? (Scope: 2 years)
Guidance for Completing the Report
Introduction
In order to evaluate your understanding of the use financial statements in decision-making, you are asked to assume the role of a financial analyst for parts 1-9. Your group will study the profitability, stability, solvency, and potential for growth of two publicly held companies from the perspective of outside users consisting of investors and creditors. Try to think of your analysis as a form of storytelling. You are going to tell the story of what your company has been doing for the past three years and where you think it will be going in the future.
Before you begin to produce your written outlines and undertake the analysis of your companies’ financial statements, you need to compile the following information:
1. Industry information.
2. A company profile. 3. Any current news stories that might impact your company’s future prospects.
4. Historical stock price information.
5. Annual reports of 10-k filings for at least four years.
6. Calculations of financial ratios appropriate for completing the level 2 analysis described below (done in the weekly assignments).
Once you have collected the information above, your group will be ready to create your report. Your audience is investors who what to know whether they should buy stock and creditors who also have a stake in the company’s well-being. To tell them your companies’ story convincingly, a successful presentation should consist of the following levels of analysis.
Level 1 — Business and Industry Analysis
The first part of this level of analysis (no more than five of your presentation) should focus on industry profitability and be organized around at least three of the following topics:
1. Rivalry among existing firms
2. Threat of new entrants into the market
3. Threat of substitute products
4. Bargaining power of customers
5. Bargaining power of suppliers
6. Overall evaluation of industry profitability
The second part should be a competitive strategy analysis consisting of:
1. A comparison of your firms’ competitive strategies to its competitors. 2. An assessment of the companies’ ability to sustain its competitive strategy.
3. An assessment the threats from competitors.
4. A discussion of any potential changes in your firms’ industry structure that could make your companies’ competitive strategy ineffective.
Finally, you should identify all sources of information (other than annual reports and 10Ks) used in the first two parts. Each group must compile a bibliography to accompany your individual outlines. The sources are to be identified in a manner that would allow the reader to quickly track down the information. For example, in identifying a particular article, you should specify the article title, publication, author(s), date, and pages.
Level 2 — Analysis of Historical Financial Data
Using the financial data generated in parts 2-5, you will conduct analyses of your firms’ profitability, solvency, and operating efficiency that should provide support for your conclusions. You should evaluate the horizontal, vertical, and trend results. Compare your companies’ ratios across at least three years, with each other and to industry averages. When you discuss the ratios, you need to address the profitability and total asset management, liquidity, solvency and financial risk, efficiency and operating asset management, and market strength. You do not need to discuss every single calculated ratios. Which ratios you choose to highlight in your report will depend on what issues are critical to your conclusions. However, at a minimum, your report should cover the following ratios:
1. Liquidity Ratios to measure the firm’s ability to meet maturing short-term obligations. a) Current Ratio
b) Quick Ratio or -Acid Test- Ratio
2. Financing Ratios – provide some indication of the riskiness of a company with regard to its ability to pay its long-term debts.
a) Debt to Equity Ratio
b) Times Interest Earned Ratio
3. Activity Ratios – measure a company’s efficiency in managing its assets.
a) Receivables Turnover Ratio
b) Inventory Turnover Ratio
c) Payables Turnover Ratio
4. Profitability Ratios – assist in evaluating a company’s profit-making activities.
a) Gross Profit Percentage
b) Return on Shareholders’ Equity
5. Stock Ratios: These ratios can be used to analyze share price.
a) Earnings per Share
b) Price Earnings Ratio
c) Dividend Yield
Also, highlight any significant changes including whether the company’s situation has deteriorated or improved with respect to the various categories. You should definitely comment on the relative performance of each company to other companies in the industry. Your conclusions should tie together all of the preceding analysis into both an investment and a credit recommendation.
Then, you need to switch focus to act as a CFO looking to land a new job and a senior consultant to make recommendations in parts 10 and 11.

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