Reading and Using Annual Reports: Financial Statement Analysis

Activity Overview
Purpose of the Activity
The purpose of this activity is to help you synthesize many important aspects of accounting. Just
as the title states, you will read and use financial information presented by a company in the form
of an annual report. This activity helps you learn to gather information and become aware of the
sources of financial information and then interpret, analyze, and use the information to evaluate
the publicly traded company of your choice. You will also be given the opportunity to
demonstrate your presentation skills as you communicate the facts you have uncovered in your a
PowerPoint presentation.
SCANS:
A prescribes to the application and integration of skill re!uirements set forth in the
".#. #ecretary of $abor%s ommission on Achieving &ecessary #kills '#A&#( as a
measure of the effectiveness of teaching and learning. )f the list of *+ #A&# identified by the
ommission, the following competencies are associated with this pro,ect.
-.hibition of /esponsibility
Ac!uisition of information
"se of information skills
Application of data gathering skills
Application of analytical skills
"se of ratio analysis skills
0evelopment of business writing skills
"se of presentation software
1ncreased familiarity with industry analysis techni!ues
Activity Summary
This activity re!uires you to select the publicly traded company of your choice, and prepare a
financial statement analysis consisting of four separate but integrated components. You will need
to gather information and prepare the analysis of your findings from three different perspectives 2
that of a short3term creditor, a long3term creditor, and a potential investor. 4or the final report,
you will be asked to assume the role of an employee of a fictitious company. Your findings in
Parts A3 will then serve as the basis for Part 0, an overall financial statement analysis that
includes the three previous reports. Your findings will be presented in the form of both a written
memo '+35 page( and a brief PowerPoint presentation.
Activity Outcome:
"pon completion of this activity, you will be better prepared to use financial statements to identify
strengths and weaknesses of a company. You will also become familiar with the tools of analysis
that will allow you to conduct future analyses.
Reading and Using Annual Reports: Financial Statement Analysis
PAR A: !i"uidity
#ue #ate: $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
You are an analyst for a private company who has been assigned the task of preparing a li!uidity
analysis of a new customer. The analysis will be in the form of a 6emo to the 4iles, which the
head of your department will review.
%nstructions:
7. )btain a copy of the annual report for your selected company. /ead the financial
statements, notes to the statements and 6anagement 0iscussion 8 Analysis sections.
9elow are several recommended sites that should contain such data:
Your company;s homepage. "sually the <investor relations= or <about the company=
sections.
>oover; )nline www.hoovers.com
Yahoo 4inancials http:??finance.yahoo.com?
#- -lectronic 0ata @athering and /etrieval http:??www.sec.gov?edgar.shtml .
&' )utline a draft of your memo and include the following sections in the body of the memo:
1ntroduction
/atio Analysis and 1nterpretation
/ecommendations
+. alculate the ratios that indicate li"uidity: the urrent /atio, Auick /atio, &et #ales to
Borking apital, /eceivable Turnover /atio and 1nventory Turnover /atio. Prepare the
ratios for the two most recent years.C &ote, you may use financial ratios that have been
provided by a reputable financial Beb site.
*. Analyze the trends over time 'increasing, decreasing, fluctuating, etc.(. -.plain what the
numbers might indicate based on the financial statements and your knowledge of
accounting.
5. Prepare a typewritten memo reporting your findings, interpretations, and
recommendations. 'Two page 6AD16"6 length plus an appendi. containing ratio
calculations(. The following format is provided an e.ample.
6-6) T): redit 4iles
4/)6: Your &ame
0AT-: 0ue 0ate of Assignment
#"9J-T: redit Analysis of EYour ompany%s &ameE
%ntroduction: 0escribe what you will and will not cover and why it is important to the reader.
Ratio Analysis: 1n two3five paragraphs, describe the numbers and facts, and interpret them 'i.e.,
their impact on the lending decision(. 1nclude also in your analysis management;s own view of its
performance according to its 6anagement 0iscussion and Analysis. /atio calculations may be
attached as an appendi..
Recommendations: -.plain why you should or should not grant credit.
You must use a Beb site that has at least two years of comparison data. )therwise, you will need to find another company. .
Reading and Using Annual Reports: Financial Statement Analysis
PAR ( ) Profita*ility
#ue #ate $$$$$$$$$$$$$$$$$$$$$$$$
You have recently inherited a large sum of money. After en,oying a brief, but intense, spending
spree, you plan to invest F5,GGG to purchase the stock of a publicly traded company. You have
decided to prepare a profitability analysis of your prospective purchase. Prepare your analysis in
the form of a 6emo to the 4iles.
%nstructions:
+' "se the same annual report data re!uired in parts A and 9 above: financial statements,
notes to the statements, and 6anagement 0iscussion 8 Analysis sections.
H. )utline a draft of your memo and include the following sections in the body of the memo:
1ntroduction
/atio Analysis and 1nterpretation
/ecommendations
+. alculate the ratios that indicate profitability' #ample profitability ratios include @ross
6argin, 9efore Ta. 6argin, &et 1ncome, /eturn on Assets, /eturn on -!uity, -arnings
per #hare, and Price3-arnings /atio. Prepare the ratios for the two most recent years.C
&ote, you may use financial ratios that have been reported at a reputable Beb site. Your
responsibility is to represent the profitability category of ratios in your memo. 1f your
particular company has other profitability ratios, choose the ratios that are available. Just
be sure to interpret the ratios you describe.
*. Analyze the ratios in terms of the trend over time 'increasing, decreasing, fluctuating, etc.(
and then e.plain what the trends might indicate. -.plain what the numbers might be based
on the financial statements and your knowledge of accounting.
5. Prepare a 6AD16"6 two3page typewritten memo, reporting your findings,
interpretations and recommendations. 1nclude also in your analysis management;s own
view of its performance according to its 6anagement 0iscussion and Analysis. The
following format is3 provided as a sample:
6-6) T): The 4iles
4/)6: Your &ame
0AT-: 0ue 0ate of Assignment
#"9J-T: Profitability Analysis of Eompany &ameE
%ntroduction: #escribe what you will and will not cover and why it is important to the reader.
Ratio Analysis: 'H35 paragraphs( describe the numbers and facts, and interpret them 'tell their
impact on your investment decision(. /atio calculations may be attached as an appendi..
Recommendations: -.plain why you should or should not invest. .
C You must use a Beb site that has at least two years of comparison data. )therwise, you will need to find another company. .
Reading and Using Annual Reports: Financial Statement Analysis
PAR C ) Solvency
#ue #ate $$$$$$$$$$$$$$$$$$$$$
Assume you are a financial analyst for a private banking group who has been assigned the task of
preparing a long3term solvency analysis of your selected publicly traded company. Assume the
company has applied for long3term financing. The analysis will be reported in the form of a 6emo
to the 4iles, which the head of your department will review.
%nstructions:
7. "se the same annual report data re!uired in part A above, including financial statements,
notes to the statements, and the 6anagement 0iscussion 8 Analysis.
,' )utline a draft of your memo and include the following sections in the body of the memo:
1ntroduction
/atio Analysis and 1nterpretation
/ecommendations
+. alculate the ratios that indicate solvency. #uggested solvency ratios include the 0ebt
/atio, Total $iabilities to &et Borth /atio, and overage /atio 'times interest earned(.
Prepare the ratios for the two most recent years.C &ote, you may use financial ratios that
have been reported at a reputable Beb site. Your responsibility is to represent the solvency
category of ratios in your memo. 1f your particular company has other solvency ratios,
choose the ratios that are available. Just be sure to interpret the ratios you describe.
*. Analyze the ratios in terms of their trend over time 'increasing, decreasing, fluctuating,
etc.(. -.plain what the numbers indicate based on the financial statements and your
knowledge of accounting.
5. Prepare a 6AD16"6 two3page typewritten memo reporting your findings,
interpretations and recommendations. 1nclude also in your analysis management;s own
view of its performance according to its 6anagement 0iscussion and Analysis. The
following format is provided as an e.ample.
6-6) T): 9ank 4iles
4/)6: Your &ame
0AT-: 0ue 0ate of Assignment
#"9J-T: #olvency Analysis of Eompany%s &ameE
%ntroduction: describe what you will and will not cover and why it is important to the reader.
Ratio Analysis: 0escribe in two3five paragraphs the numbers and facts, and interpret them 'tell
their impact on the lending decision(. /atio calculations may be attached as an appendi..
Recommendations: -.plain why you should or should not grant credit.
C You must use a Beb site that has at least two years of comparison data. )therwise, you will need to find another company. .
Reading and Using Annual Reports: Financial Statement Analysis
PAR # ) Complete Company Report
#ue #ate $$$$$$$$$$$$$$$$$$$$
You are an employee of a successful accounting firm and have been asked to prepare a complete
company analysis on a prospective new client for the firm. You should include relevant findings
from the memos you completed in Parts A, 9 and . >owever, you will also need to include
additional research of the industry in which the company operates. 1nclude also critical issues
facing the company. in addition to preparing a written report, you will need to prepare a brief
presentation of your recommendations.
%nstructions:
7. )btain other news articles about the company. )btain additional information about the
company%s industry. >oovers )nline 'www.hoovers.com( is a useful site for company and
industry data. /obert 6orse 8 Associates and Ialueline also prepare key ratios by
industry 'available at a local library(.
H. )btain additional business3press articles about the company. 4or e.ample, Business Week,
Barrons, Forbes, and Fortune are among the business magazines available online. In
order to develop a balanced perspective of the company, it is important to seek the
viewpoint of objective parties outside the company.
+. 0raft the company report. "se the sample table of contents below for guidance:
Sample a*le of Contents
-.ecutive Summary: #ummarize your results in two3three paragraphs.
Company (ac/ground: #ummarize the company;s business segments, products, services, and
length of time in business, size, ma,or competitors, etc., in two3three paragraphs.
%ndustry rends: H3+ paragraphs e.plaining the nature and financial condition of the industry.
0ori1ontal and 2ertical Analysis: 'H3+( paragraphs plus financial computations. These are
comparisons across time and across components of the financial statement. Ask your professor for
assistance in downloading the -.cel spreadsheet for your company;s horizontal and vertical
analyses.
Financial Analysis: sections covering $i!uidity, #olvency 8 Profitability. Your financial analysis
6"#T compare your company to its industry.
Critical %ssues: 1dentify and discuss two ma,or issues facing the company based on article
research: ompetition, /egulation, -conomy, Politics, $itigation, Public oncerns, etc.
Summary and Conclusion: Take two3three paragraphs to wrap things up. 1nclude your
recommendations.
Reference !ist: "se and cite at least five sources
Appendi.: harts, graphs, ratio computations, horizontal and vertical analyses, etc. may be
included in the appendi..
4. Prepare a brief !"#$% slides& PowerPoint presentation describin' relevant facts about
your company. Include a financial summary in your presentation.