Financial Statements
Name
Institution
Date
Financial Statements: How to Navigate in them
Introduction
It is important to determine the financial position of a firm. In most cases, organizations become successful when they prudently carry out financial management and publish the statements as ways of ascertaining their health at any given time. Seconding this is that, financial statements can be applied to woo investors into the firm. This is backed by the knowledge that financial statements either are applied wholly to determine whether the firm is at shutdown, break-even point, or profit making. This research will assess four financial statements of the following companies; General Mills (US), Meiji Group (US), Caterpillar (US) and Komatsu Japan. The case analysis will attempt to examine several factors that makes-up a financial statement, and as a result, prove the firm viability in relation to operations. The research will attempt to prove to that determining the financial position of a firm is categorically imperative in deliberating the future success factors of the firm.
Assignment 1: Case Study Analysis
Balance Sheet
The components that are disclosed
General Mills
According to the Fiscal year 2011, General Mills experienced the following components of stockholders. The company offered pension and other post-retirement benefit plans amounting to about US$220.8 M.
Meiji Group
For the year ending March 31, 2013, Meiji group disclosed an interest cost of US $24, 726, Service Cost $ 42, 362, Amortization of net retirement benefit obligation at transition as $20066, Amortization of actuarial loss at $70266, and Amortization of Prior Service cost US $ 585. The contribution to employees pension Fund was $ 2098 while the additional retirement benefits paid on a temporary basis $ 335, and others amounted to US $ 11,078. These figures present the wider Meiji Group CSR framework and how the group is committed towards achieving decisive goals in relation to CSR.
Preferred Stock
Yes, both companies do have preferred stock on shares. The companies are offering preferred stock shares. For the special features, the group has enabled members to possess shares and voting rights in all profits or losses. This affects the equity investors who do not provide sufficient financial resources vital in supporting the group’s activity. In addition, the group has a legal structure specially mandated to oversee these provisions.
Report treasury shares
Yes, the companies do report to treasury shares. In the year 2010, General Mills shares increased its provision for treasury shares to a magnitude US $ 595 Million this partially offset by $ 568 million related to stock-based compensation plans. In addition, the company improvised Additional paid in capital by $ 13 million from fiscal 2010, which was partially related to stock compensation activity. On the other hand, Meiji increase treasury to common stock by 9,000 shares. The two provisions can be attributed to the purchase of shares that are less than a unit.
Income Statement
Basic and diluted earnings per share for each company
In the fiscal year 2011, the basic earnings per share increased from $2.32 to a present of $ 2.80. General Mills reported diluted EPS of $ 2.70. However, this was still an increase from $ 2.24. This can be attributed to losses from the market-to-market valuation of certain commodity position and grain inventories. In addition, the economic recession did affect the total consumption. On the other hand, Meiji group recorded a $ 24 net income per share in the year ended 2013. This was a significant increase from the previous year, which stood at $ 9.6.
Have the companies reported any discontinued operations
In each of the fiscal year, 2011 and 2013 for General Mills and Meiji Group none of the companies registered a discontinuity of activities.
Stock compensation plans
General mills have recognized a straight-line over the vesting period. The group has been recorded in SGA. Showing the cost of total sales in the consolidated statement, aggregate earnings, and allocation to each of the reportable segments in the results. The value of compensation plans that include income tax benefits is at $ 546.2. In contrast, Meiji Group has a subsequent stock compensation of $ 1,500 and the reporting plans are under the fair value of intrinsic worth since they are segmented into two food and pharmaceuticals.
Financial Ratios
Compute the following ratios. Also, interpret and assess each group of ratios for the company. What type of story are the ratios telling the analyst?
General Mills
Profitability ratios:
Gross Profit Margin = Gross Profit/ Total Revenue 2, 428/ 14.880 billion = 1.631
Net profit margin = Net Income/ Sales Revenue 1,803/ 14.880 = 0.121
Return on stockholders’ equity = Net Income/ Total Equity 1, 803/ 6,612 0.27 of a dollar
Liquidity ratios:
Current ratio = current assets/ current liabilities 18, 674/ 12,063 = 1.54
Quick ratio = cash in hand+ cash at bank+ receivables / current liabilities
= 619+1, 1623/ 995.1 =12.03
Inventory turnover
Inventory Turnover = Cost of goods sold/ average inventory
Average inventory = Beginning Inventory +Ending Inventory/2
= 1,344+ 1,609/ 2 = 1, 476.5
Now Inventory Turnover = (8,926+3,192+17.4.4.4)/ 1,476 =8.22
Inventory Turnover =8.22
Leverage ratios:
Debt-to-assets = Total Liabilities/ Total assets
= 12062/ 18674 = 0.64
•Debt-to-equity
Times-covered ratios = (Net Income + Taxes) / Interest Expense
(1,803.5 +721) / 360 = 7.06
7.06
Meiji Group
Profitability ratios:
Gross Profit Margin = Gross Profit/ Total Revenue 3747/ 11030 = 0.3397
Net profit margin = Net Income/ Sales Revenue 162.99/11053 =0.01465
Return on stockholders’ equity = Net Income/ Total Equity 1, 803/ 6,612 0.27 of a dollar
Liquidity ratios:
Current ratio = current assets/ current liabilities 341211/ 312124 = 1.093
Quick ratio = cash in hand+ cash at bank+ receivables / current liabilities
= 179179+1947729/350267.31 =6.0722
Inventory turnover
Inventory Turnover = Cost of goods sold/ average inventory
Average inventory = Beginning Inventory +Ending Inventory/2
= 7,083,000+ 8,218,000/ 2 = 4500
Now Inventory Turnover = (7,908+3, 793+274)/ 4500 =2.611
Inventory Turnover =2.611
Leverage ratios:
Debt-to-assets = Total Liabilities/ Total assets
= 4,649,000/ 3,206,000 = 1.45
Debt-to-equity
Times-covered ratios = (Net Income + Taxes)/ Interest Expense
(179,128 +130413) / 16,470 = 18.79
7.06
What type of information do you find in footnotes to the financial statements?
Although the two companies had significant difference, there were significant similarities in how each of the companies managed growth. Growth is calculated on the income statement as well as the balance sheet on a three-year basis. On the other hand, cost management ratios are evident to take many forms. In the two reports, financial statement analysis and profitability analysis, the developers looked at the costs as a percent of total sales – evident in the two. Secondly, the financial statements have considered balancing. Everything is considered which include product positioning and the company product strategy. Consequently, a low-cost profit strategy seems appealing to the two companies.
While it is evident that the cost of sales is high, it is good to note that the companies have developed a coherent financial analysis mechanism. In this case, if General Millers or Meiji desired to manage cost, then schemes of profit maximization would be the key towards achieving decisive goals. As such, the two companies have experienced an upward growth strategy in relation to sales. As a result, it is good to argue that sales are changing in-accordance to the total volumes of produce. According to the financial statement, a higher expenditure on inputs is resulting in better output as well as better remuneration.
Balance sheet, income statement, or other measures such as ratios the most informative?
Yes, the two companies approach is informative on the desired information. Primarily, the goal of developing a balance sheet or a financial statement is entirely obliged to determine the company current state in productiveness. In this case, a balance sheet or a financial statement assists the respective stakeholders of this firm to determine the current position of the firm. Skinner (2011, pp. 206) joins this discussion in what the journals discusses as derived necessity to create authentic administration protocols.
Consequently, accounting and administrative controls are adequate to ensure that different transactions are executed according to standards and financial that is required in most of these developments. From the financial statement, each item can be analyzed independently. As such, we see that the total operating expenses (which in this case include costs of revenue) in both balance sheets has reduced substantially as the firms increased their activities. The cumulative results of these changes can be explained by the percentage changes of total income, which automatically means a marginal change in tax ratio.
Advantages and disadvantages of using ratios for analysis
Rations are vivid since they give a more accurate data regarding the firm current situation. In fact, the cost accounting approach in the above financial statements/ report are valuable since they do not have any of the problems of regarding the data used to prepare them they are indeed rigid requirements. As for this case, Easton (2002, pp. 75) joins the debate in his argument on what he contemplates as achieving acceptable accounting principles. Acceptable accounting principles are accomplished since any desired adjustment can be realized in the course of developing the report. Secondly, reports become easy to develop and reorganize. Thirdly, through this approach, it becomes possible to ensure that trends are established. In fact, comparing two or more things in a company is possible. Fourthly, this approach highlights important information in a simpler concise manner, and in this case, it is easier to judge the company be using ratios in studies. However, Easton (2002, pp. 75) further assess that ratios explain the relationship between the companies’ past information while ideally users are concerned about the current information. Secondly, the comparison of the two companies is not appropriate since one company is based on the service industry while the other company is operating in goods dispensation. Therefore, in this regard, the ratio approach is not constructive since it fails to meet the sense of the target. Lastly, the ratios tend to use assumptions, and this approach can be contested significantly.
Assignment 2: Session Project
Part I
Caterpillar and Financial Statements
Caterpillar makes a series of equipments, which include large-scale turbine generators capable of powering cities and earthmoving equipments. Its closest rival is Komatsu based in Japan that manufactures similar product and have the same color and branding. Caterpillar has implemented various technologies all geared towards combining mechanical and electronic platforms on a back-to-back methodology.
Because of constant blending with other industry, Caterpillar financial position has faced significant challenges. Firstly, the recession of 2008-2009 triggered low economic growth in the company although significant microeconomic decline was experienced in the 80s. Secondly, falling oil prices and stiffened economies are primarily responsible performing poorly in the general economic analysis. Thirdly, it should be noted that rivals (Komatsu) had adopted Caterpillar Maru, and due to the good political ties between Japan and developing countries, Caterpillar was losing influence of business. Caterpillar made a loss of US $ 1B in the late 1980s and early 90s.
Scholarly, it has become appropriate to examine how Caterpillar survives in the capital industry. Primarily, Caterpillar took advantage of growth by applying decisive technologies as answers to the needs of the dwindling financial statement. Secondly, the company continued to introduce new models the line excavators which used high-pressure hydraulics and thus, affecting positively to the market. Caterpillar interests me because it announced 1.1 billion investments even after suffering a 20 percent loss in total revenue and subsequently one billion losses in the same decade (Spirkina, 2008, pp. 900).
Ideally, Caterpillar management demonstrated to the public that the nature of a financial statement did not constrain the firm from achieving vital goals.
Pratt (2010, p. 4) joins this argument in what the texts argues as re-costing investment strategy. In this case, the company in question does not use financial statements to determine its weaknesses or inability but the feasibility of achieving its vital goals using a collective approach. In fact, through financial statements, the company can determine areas of investments, and subsequently invest in these areas, taking to account the firm needs a much wider approach in relation to dealing with finances. Based on this approach, I will benefit collectively in understanding the importance of financial statements in motivating the firm total health.
Assignment 2: Session Project
Part II
Financial position of Caterpillar
As established earlier in this discussion, Caterpillar closest rival is Komatsu and the company does have keen business strategies all geared towards ensuring that Komatsu does not prevail in key Caterpillar markets.
Compute:
Return on Assets =
Caterpillar
Return on Assets = Net Income/ Average Total Assets
= 1,011/ 35, 138 =0.0287
Versus
Komatsu
= 1.344/24653 = 0.0545
Profit Margin =
Caterpillar
Gross profit margin = gross profit/ total revenue
208/ 711 =0.2925
Versus
Komatsu
2003/18456 = 0.1085
Assets Utilization Rate =
Revenue/ Total Assets
Caterpillar
711/ 35, 138 = 0.0202
Versus
Komatsu
1845/24653 = 0.07486
Assess your company’s competitive financial position.
After a close analysis of the above report, it is good to argue that the Caterpillar edges out rivaling Komatsu in the financial profitability section. The following internal analysis has identified the main sources of information based on strategic development. In this case, it is prudent to argue that Caterpillar has enjoyed significant performance in the last decade. This is distanced from the company performance in 1980s, which saw Komatsu charging negatively against the company. Then it is good to argue the 80s investment in the capital assets led sustainable competitive advantage.
Compute the free cash flow for your company and its competitor.
Free Cash Flow for the company
ITEMS Cost of debt 14% EBIT
Tax rate 34% Investment
Cost of equity 16% Amount borrowed
CASH FLOWS TO STOCKHOLDERS Year 2011 2012 2013
Earnings before Interests taxes 3,803 6,999 8,692
Less interest -246 -363 -482
Earnings before taxes 11,307 15,734 18,023
Taxes 968 1,720 2,528
Net income 2,700 4,928 5,681
Investment by shareholders -24 -24 -14
Net cash flow to shareholders 3 3.36 3.36
WEIGHTED AVERAGE COST OF CAPITAL Proportion Weighted
Cost of of Market Cost of
Capital Value Capital
Debt (after-tax) 5.00% 11.50% 4.80%
Equity 9.00% 69.50% 14.50%
Weighted average cost of capital 11.30%
Caterpillar relative cash position
In assessment, Caterpillar demonstrates a higher degree of roll returns and guarantees superior returns. The increased number of financial assets is what makes the overall returns. In this case, the roll returns pushes the company to relatively high cash position for inquiring cash on investment to a spot position. In analysis, investing in financial investments ensures that the company has derivative advantages. A financial asset directly offers the benefit of avoiding the finance cost and technically disadvantage of losing the dividend. According to Caterpillar income statement, it is good to note assets are primarily responsible for forward contract, which generates positive roll return.
Assignment 3:
3.1 Managerial accounting versus financial accounting
In context, both management and financial reports seek to adhere to the fundamental concept of cost measurement and recognition when contemplating of future, presents, and past. Financial accounting measures and reports do follow strict guidelines and largely those accepted accounting principle in reporting to past operations to external users. However, on the other hand, management accounting guides a firm on the desired decisions, creation of effective at their jobs and on overall improvement of the aggregate organization’s performance. Secondly, managerial accounting is not a subsequent of financial accounting but it player a wider role in the process of tax accounting, financial accounting, and information analysis. Thirdly, managerial accounting reports for internal use and in this case, it reports to user driven needs. In fact, this approach is decisive since it encourages the use of innovative presentation techniques proper data analyses and to a greater regard expand the usefulness of information to stakeholders.
3.2 Explain the contribution margin concept/computation and when to use the information
The contribution margin of revenue received is chiefly responsible for the enhancement of variable costs of producing a product. This concept is important and complicated than it my first appear. In computation, it is necessary to consider the nature of constrained resource and the impact that they do have on relative organizational development. The basic formula for calculating contribution is contribution margin = price – variable cost. In this case, the fixed cost is paid in any event in an excess of the revenue is paid on variable costs and is used to provide extra money to the organization. As this is the case, the general rule to achieve a contribution margin is based on the financial viewpoint. The organization is required to proceed with elements that should contribute directly and inherently to improve the overall financial life to the organization. As a result, one can use this information when computing the aggregate financial situation of a firm. In fact, these computations will naturally guide a firm to determine when to reinvest (for instance, Caterpillar when to buy more tractors) and when to hoard.
Conversely, it is good to acknowledge that management accounting examines and compare, the past, present, and the future of the firm. Indeed, management accounting looks to the important past, present, and the future of the firm. As a result, management accounting specifies the structural cogitation of analysis. They can be applied towards examining converging industries economic markets and operation decisions. Therefore, in the analysis is positive to argue that management accounting is applied widely in determining what should be done in the financial accounting.
References
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Duncan, P. J., & Easton, S. A. (2002). The pricing of High Yield Equity Notes. Accounting and Finance, 42(3), 239-249.
Skinner, D. J. (2011). Accounting Research in the Japanese Setting. The Japanese Accounting Review, 1(2011), 135-140
Spirkina, G. V., & Efimova, L. B. (1987). Steels for parts of the propulsion system of industrial Caterpillar tractors. Metal Science and Heat Treatment, 29(12), 899-901
Pratt, J. (2011). Financial accounting in an economic context. Hoboken, NJ: Wiley
Principlesofaccounting.com. (n.d.). Chapter 17 Multiple Choice Questions. Retrieved from HYPERLINK “http://www.principlesofaccounting.com/questions%20-%20%20multiple%20choice/chapter%2017%20-%20multiple%20choice.htm” t “_blank”http://www.principlesofaccounting.com/questions%20-%20%20multiple%20choice/chapter%2017%20-%20multiple%20choice.htm
Unknown. (n.d.). The Role of Management Accounting in The Organization. Retrieved from HYPERLINK “https://docs.google.com/viewer?a=v&q=cache:MWZE_XMqFOUJ:www.swlearning.com/accounting/albrecht/management_2e/expanded/exp_01.doc+Financial+versus+managerial+accounting%3F&hl=en&gl=us&pid=bl&srcid=ADGEESjWheQRI7nzm3i5Zmwsd3la9aWDQDy9N3RbBWiQns9ic71gNJoRxVa75E4KWSi0GthsbXrfNpSEQ_UZvr0QenNE-Ut6XU_9v6Yda0SVULodDfzIGRSb8Pf30b9I3qN0lWmUoXzZ&sig=AHIEtbRDmHJSiuRsS9v6FrbERAz9cqTPEw” t “_self”https://docs.google.com/viewer?a=v&q=cache:MWZE_XMqFOUJ:www.swlearning.com/accounting/albrecht/management_2e/expanded/exp_01.doc+Financial+versus+managerial+accounting%3F&hl=en&gl=us&pid=bl&srcid=ADGEESjWheQRI7nzm3i5Zmwsd3la9aWDQDy9N3RbBWiQns9ic71gNJoRxVa75E4KWSi0GthsbXrfNpSEQ_UZvr0QenNE-Ut6XU_9v6Yda0SVULodDfzIGRSb8Pf30b9I3qN0lWmUoXzZ&sig=AHIEtbRDmHJSiuRsS9v6FrbERAz9cqTPEw
