To Invest or not Invest

February 9, 2018Uncategorized

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Write a 2- to 4-page business memo that provides an investment recommendation based on your financial analysis of a selected company.

Note: Some of the assessments in this course build upon each other, so you are strongly encouraged to complete them in the order in which they are presented.

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When preparing financial statements for financial reporting, one of the main objectives is to provide information that will be useful in making recommendations and decisions regarding investments and credits.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

· Competency 4: Integrate accounting analyses into general business management planning and decision making.

o Analyze a company’s financial statements to determine its viability for investment.

o Provide an investment recommendation based on an analysis with referenced support.

· Competency 5: Communicate in a manner that is professional and consistent with expectations for members of the business professions.

o Communicate in a manner that is professional and consistent with expectations for members of the business professions.

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Some companies wish to report a steady growth in income to investors and achieve this goal through accounting practices known as earnings management. One type of earnings management is through the use of reserves for maintenance (also known as cookie jar reserves).

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For example, in good years a company may increase maintenance expense by ten or twenty percent over their actual cost for the year. The company will record this by a debit to maintenance expense and a credit to a liability account created for this purpose, called deferred maintenance. In a bad year, the company will debit the deferred maintenance account and credit maintenance expense.

The rationale is that when times are good and the factory is busy, the company may get behind on maintenance. When a slowdown in production occurs, the company has time to catch up on its maintenance.

The actual practice has been observed to have much more to do with the company’s ability to report a steady growth in earnings than with the rationale given above.

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Preparation

For this problem, you will need to select a publicly traded company. Once you have selected a publicly traded company, obtain Form 10-K for the company for the most current fiscal year. Use the EDGAR database from the U.S. Securities and Exchange Commission (SEC) or the investor (or investor relations) page on the company’s site.

Follow these steps to find Form 10-K for your selected company using the SEC’s EDGAR database:

1. Go to the Company Search Page by clicking the link in the Required Resources, under Internet Resources.

2. Type the company’s official name in the Company Name box to search for the company’s filings.

3. Select the 10-K form from the list of search results.

Analysis of a Company’s Financial Statements

Assume you have been hired by a client to evaluate the financial health of the company you have selected. The client wants advice on whether or not the company is a viable option for their current portfolio. Create your analysis and recommendation for the client using the company’s financial statements and your prior knowledge of accounting, supplemented by textbooks or other references of your choosing, to answer the following questions and computations:

4. What were the company’s assets, liabilities, and owners’ equity amounts at the end of fiscal year?

5. If the company were liquidated at the end of the fiscal year, are the shareholders guaranteed to receive the total shown in your answer for owners’ equity (question 1)? Clearly explain why or why not.

6. What were the company’s noncurrent liabilities for the fiscal year?

7. What was the company’s current ratio for the fiscal year?

8. For the fiscal year, did the company have a cash inflow or outflow from investing activities? How much?

9. For the fiscal year, how much was the company’s cash flow from operations? Why is this not the same amount as the company’s operating income? Explain in general terms.

10. What is the company’s revenue recognition policy? (Hint: Look in the notes to the financial statements.)

11. Calculate general, administrative, and selling expenses as a percentage of sales for the past three fiscal years. By what percentage did these expenses increase or decrease? This is calculated as Percentage Change = (Current Year % − Prior Year %) / Prior Year %.

12. Compute the company’s total asset turnover for the fiscal year and explain its meaning. Show all of your work.

13. How much is in the prepaid expenses and other current assets account at the end of fiscal year? Where did you find this information?

14. What did the company report for deferred rent and other liabilities at the end of fiscal year? Where did you find this information?

15. What is the difference between prepaid rent and deferred rent?

16. What are accrued liabilities? Describe in general terms.

17. What would generate the interest income that is reported on the income statement?

18. What are the company’s earnings per share (basic only) for the three years reported?

19. Compute the company’s net profit margin for the three years reported. What does the trend suggest to you?

20. How much cash and cash equivalents does the company report at the end of the fiscal year?

21. What was the change in accounts receivable and how did it affect net cash provided by operating activities for the current year?

22. Compute the company’s gross profit percentage for the most recent two years. Has it risen or fallen? Explain the meaning of the change.

Deliverable to the Client: Analysis Summary and Investment Recommendation

Prepare a business memo addressed to the client summarizing your analysis and providing a recommendation on investing:

· Write 2–4 pages in a professional format appropriate for the information you are presenting.

· Make sure you have answered all of the provided questions and computations in your analysis. If a question or computation does not apply, there should be a statement within your memo stating that the aspect does not apply and why. For example: “Based on the review of the XYZ Company, there were no prepaid expenses.”

· Include support for your investment recommendation by citing the company’s financial statements and other references of your choosing,