FIN212A- FINANCIAL STATEMENT ANALYSIS PROJECT

OVERVIEW

The primary purpose of this project is to provide you with an in-depth look at audited financial statements.  You will be conducting a comprehensive analysis of the financial statements and related notes contained in the audit reports of two organizations that you choose to study selected from a list of paired companies.  The specific steps that you should follow in completing this project are presented below.

PROJECT LOGISTICS

The project is to be conducted on a group basis.  Each student will be assigned a group by the professor. Groups will include five students. Each group is responsible for choosing, in priority of preference, three sets of paired companies from a list at the bottom of this document.  Every effort will be made to assign a pair from your preference list but there is no promise that we will be able to accommodate all requests. If you prefer to study another pair of public companies that do not appear on the list, please check with me to determine if these companies are a good fit for the project.

To complete the project, you need to obtain audited financial statements for the most recent fiscal year for these companies. These may be found in the investor relations section of the company’s website. It can also be accessed through the SEC and financial aggregators.  Students are encouraged to go to the Business and Economics Library page for other sources of financial information, such as FactSet and CapitalIQ.

Each group is expected to electronically submit two files reflective of their group’s effort. The first is an excel file which includes a list of the following required exhibits for each of the two companies in the analysis:

1. Comparative annual balance sheets for the most current year end, and the previous three year-ends.

2. Comparative annual income statements for the most current year, and the previous three years.

3. Comparative annual statement of cash flows, for the most current year, and the previous three years.

4. Most current annual statement of stockholders’ equity.

5. Common-size balance sheets and income statements for the most current year and the previous three years (for balance sheets choose total assets as the base item, for income statements choose total sales as the base item)

6. Extended DuPont Analysis (decompose both ROE and ROA). Be sure to show each element of the formula

7. Industry Benchmarks for DuPont Analysis components for the most recent year and the previous year

8. At least five additional ratios that your group has chosen to calculate based on the questions generated in your DuPont Analysis (make sure to include at least one activity ratio, one liquidity ratio, one solvency ratio and one market test ratio)

Note: Common-size statements, as well as ratios, should be clearly presented and should clearly show the formulas used in the calculation. In each of the required exhibits, make sure the most recent year appears on the left and the previous years on the right.

The second file to be submitted on behalf of the group is a Word file which should not exceed 10 double spaced pages with font size 12. Each report should start with a cover page, which is not included in the 10-page count. On the cover page you should provide a table that summarizes each member’s contribution in percentage to the overall project (the total should equal 100%). Please be very careful about citing sources where appropriate. Each report should conclude with a bibliography.

Appendix with exhibits should be included after the bibliography section. The tables and figures presented in these exhibits should be numbered and referred to within the 10-page analysis. Make sure to fit teach table or figure neatly into one page, and list the source in a footnote.

PROJECT REQUIREMENTS (Your analysis should include the following but is not limited to these items.)

1. The project should begin with an introduction describing the nature of the entities being analyzed:  What industry are the two companies in?  What are the most important characteristics of the industry?  What are the opportunities and challenges the industry faces in the current and future environment?  Describe each of the two companies.  Include a description of their products, markets, competitors and the opportunities and challenges each of them faces.

2. Review the common-size income statements and balance sheets for each company, identify and discuss significant changes that warrant attention (a change of 2% or more is considered significant). Investigate and provide explanation for these changes.

3. Ratio Analysis:

I. Using the Extended DuPont analysis as reference:

a) Explain what each ratio means in the context of the companies that you are analyzing (do not copy the definition from the textbook. Use your own words)

b) Identify significant changes over the three-year analysis period.

c) Explain the reason(s) for these changes based on information in the notes to the financial statements and in the Management Discussion and Analysis. If necessary, you may refer to outside reports and analysis including stock analyst reports.  Indicate whether you believe that these are favorable or unfavorable trends and discuss your interpretation of such trends along with their implications.

d) Identify which company is stronger in each component of DuPont Analysis and also determine whether each company is performing above, below, or at industry performance levels.

II. Based on the above analysis, choose at least five but no more than seven additional ratios (at least one activity ratio, one liquidity ratio, one solvency ratio and one market test ratio) which allow you to analyze more deeply the strengths and/or weaknesses you have identified in your DuPont analysis.  Repeat steps (a) through (d) in part I. Discuss what these ratios add to your understanding of the companies’ financial performance and what they indicate about operations.

4. Use the 10-K to Obtain answers for the following questions:

a) What type of inventory cost flow assumption(s) does each company use? (Do not copy the paragraph from the 10-K. Provide only one line for each company). If one or both of the companies uses LIFO, explain what would have been the impact of using FIFO on the comparison of the inventory turnover.

b) What type of depreciation methods are employed by the companies that you are examining? (Do not copy the paragraph from the 10-K. Provide one or two lines for each company).

c) Are there liabilities that may exceed the amounts reflected in each company’s balance sheet? Refer to the note on contingent liabilities, as well as any notes on off-balance sheet items, and explain what would have been the impact of these amounts had they been recorded in the balance sheet. Clearly specify the source for this information.

d) Review the statement of stockholders’ equity for each of the two companies. Identify the major transactions that impacted the stockholders’ equity in the current year and the previous one (Do not copy the paragraph from the 10-K. Use your own words).

e) Review the statement of cash flows for each company and identify their major sources and uses of cash. (Do not copy the paragraph from the Management Discussion and Analysis. Use your own words)

f) Read the Reports of the Independent Auditors for each of the companies for the most current year.  Are these reports reflective of standard unqualified audit reports? If not, explain the departure from the standard and indicate whether or not the departure is favorable or unfavorable.  (Do not copy the paragraph from the 10-K. Use your own words, and provide only one line for each company if the report is reflective of standard unqualified audit report).

5. Finally, if you had $500,000 to invest in one of the two companies you have analyzed, which would be the better investment and why?  Make sure to utilize the analysis you have done earlier in the paper to support this decision.  In addition, read and reference at least one article on the industry and one stock analyst report on each company. (If you studied valuation in prior course work, you may comment on the expected value of the investment at the end of 5 years, but this is not required)

In addition to the Excel file and the Word file which are to be submitted once on behalf of all group members, each group member is required to submit a confidential peer evaluation, where you will be asked to rate each other’s contributions, team work, responsiveness and communication. These peer evaluations will be taken into account for grading purposes.

Pairs of Companies for Analysis: