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Financial Statement Analysis ACC561 8-2-2010 Financial Statement Analysis The analysis of financial ratios is important in tracking a firm’s performance over time. Many ratios are used to indicate different data, how well a firm is utilizing its assets, and how well they meet their short-term and long-term obligations. The measurement conventions express different areas of company activities; all found by examining the financial statements and balance sheets. The ratios found for the three industries used all yield vastly different results and cannot be compared in their economic size in relation to the others. Barnes & Noble as well as Progress Energy provide their financials quarterly, while Toyota’s income statements and cash flows provided annually. Presentations can be used to calculate the performances within the different industries by using quick and current liquidity ratios to provide information on a firm’s ability to meet its short term financial obligations which highlight differences based on the liquidity of inventory. Other ratios, such as the financial leverage show clarity of a firm and how they meet long-term debt obligations by comparing debt to total equity. In this case, all three industries can be compared side-by-side and provide a successful view that shows which firms are exceeding their current liabilities. The different measurement ratios were useful in indicating the progress of firms, and their effectiveness in their respective industries. IASB Measurement Conventions affect Presentations With any organization or structure the need for standards of operating is important; the FASB (Federal Accounting Standards Board) and the IASC (International Accounting Standards Committee) concluded that in order for accounting to function properly a standard should be enforced ensuring accountants perform and adhere to the legal policies. To achieve this goal a merging of previous standards nationally and internationally were implemented. Once investigations began, IASC members found that not many differences separated the already existing frameworks of both the FASB and IASB. The difference found however, was that the FASB heavily articulated frameworks more than the IASC. Although condensing information is wise in some circumstances, in regards to standards it is necessary that explanations are fluid, by not fully going into detail, the IASC framework would hamper the ability of the IASB to use the IASCs foundation to develop future standards; which would inevitably affect presentations. Re-analyzing the convergence would enable the two entities to come to an agreeable conclusion regarding any discrepancies in frameworks and provide a better way to implement standards for the accounting world. Different FASB Measurement Conventions affect Presentations “Since 1973, the Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting that govern the preparation of financial reports by nongovernmental entities (FASB, 2010).” The FASB, designated by the Securities and Exchange Commission (SEC), develops generally accepted accounting principles (GAAP) within the United States. The goal is to create standards for preparing and reporting financial statements that are easy to interpret by public users and investors. The significantly transformed accounting reporting formats widely known and used are the balance sheet, income statement, statement of cash flows, and statement of retained earnings. The balance sheet provides total assets, liabilities, and shareholders’ equity as well as balances assets with liabilities and shareholder’s equity. Analyzing these financial statements reveal a company’s financial activity to include profit margins, expenses, and financial ratios within a specific time.  Cash Basis vs. Accrual Basis The accrual basis of accounting is the foundation for the measurement of income in our modern system of accounting. The best way to understand the accrual basis is to compare it with the simpler cash approach. The cash and accrual bases of accounting differ with respect to the timing of the recognition of revenues and expenses. When comparing the cash and accrual bases the essential differences between recognition of revenues and expenses are simplified; “for the cash basis, revenue is recognized when received and expenses is recognized when paid; for the accrual basis, revenue is recognized when earned and expenses is recognized when incurred (Horgren, pp. 687, 2008).” The income statement is used to prepare both the cash and accrual bases transactions. The purpose of the financial statements is to communicate various types of economic information about a company. Toyota Motor Company Time is an important concept when determining which method to use regarding the accrual or cash basis of accounting. Because time makes a crucial impact on majority of the financials received by a company, Toyota was chosen to experiment with the idea of using a cash bases approach which would differ from their normal accrual bases approach. Using the accrual method, Toyota Motor Company sells vehicles to consumers with the intent of establishing timely payments through their financial institutions. Using the cash basis method, Toyota would have to reconfigure their financial mandates, as this would mean every person who purchased a vehicle would pay in cash at that moment. This would cause Toyota to lower prices, as there would be no need to increase specific percentages, but in fact provide more payoff balances due to cash payments in full at the time of purchase. The statement of cash flows reveal actual cash during a period of time, using this method would increase the current cash flow statement as well as provide prospects for future cash flows, which under different circumstances, would be incomplete because it cannot show inter-period relationships. Considering this alternative to their present system of reporting differs in that given the huge long-term potential of the automobile market, the company remains committed to finding ways to grow their market and at the same time contain costs. Attractive pricing is even more critical when significant economic problems are at the forefront of the country and given the need to be price sensitive, using the cash bases would cause the company to falter. Using the accrual basis allows the company the ability to control costs which is crucial to their long-term viability. Conclusion To analyze whether a company should use the accrual or cash bases of accounting will take reviewing many items on their financial statements. Several ratios were determined and analyzed within three companies; Barnes and Nobles Book Stores, Toyota Motor Company, and a small company, Progress Energy Inc. These ratios included the quick, current, and DuPont along with their profit margins, asset utilization and financial leverage percentages. All these items are found on the balance sheet, income statement or cash flow statement. References Barnes and Noble, (2010) Retrieved on July 27, 2010, from http://www.finance.yahoo.com Encyclopedia for Business. (2010). Retrieved on July 27, 2010, from www.referenceforbusiness.com/management. Federal Accounting Standards Board, (2010). Retrieved on July 31, 2010, from www.fasb.org/home. Horngren, C. T. (2008). Introduction to Management Accounting. Basic Accounting: Concepts, Techniques, and Conventions. (14th ed. pp. 687). New Jersey: Pearson-Prentice Hall. Hermanson, H. M. (2002, May 1). Obstacles to international accounting standards convergence. Retrieved July 31, 2010, from All business: http://www.allbusiness.com/accounting/953339-1.html Investopedia, (2010). Retrieved on July 27, 2010, from www.investopedia.com/terms. Net MBA, (2010). Retrieved on July 27, 2010, from www.netmba.com/finance/financial/ratios. Progress Energy, (2010). Retrieved on July 27, 2010, from http://www.finance.yahoo.com Toyota Motor Company, (2010). Retrieved on July 27, 2010, from http://www.finance.yahoo.com Exhibit 1: Quick and Current Liquidity Ratios for Barnes & Noble, Toyota and Progress Energy INC. [pic] Exhibit 2: Profit Margin |Company |Date |Total Revenue |Gross Profit |Net Income | |Barnes and Noble for retail |May 1, 2010 |5,810,565 |1,676,745. |36,676. | |Toyota |March 31, 2010 |202,814,000. |24,263,000. |2,242,000.  | |manufacturing and foreign | | | | | |Progress Energy for services |Dec 31, 2009 |9,885,000. |3,328,000. |757,000. | *(Gross Profit Margin = Gross Profit/Total Revenue ) and (Net Profit Margin = Net Income/Revenue) | | Gross Profit | Total Revenue | Net Income |Gross Profit Margin |Net Profit | | | | | | |Margin | |Barnes and Noble | 1,676,745 | 5,810,564 | 36,676 |28.86% |0.63% | |Toyota | 24,263,000 | 202,814,000 | 2,242,000 |11.96% |1.11% | |Progress Energy | 3,328,000 | 9,885,000 | 757,000 |33.67% |7.66% | Exhibit 3: Asset Utilization |Company |Barnes & Noble |Toyota |Progress Energy | |Average Collection period |106,576./3,561. |75,859,000./3,287.= 23,073 |945,000./2,317. | |(accounts receivable/ avg daily |=29.92 | |= 407.85 | |sales) | | | | |Inventory turnover (cost of goods |1,392,207./1,370,111.= 1.016 |22,685,000./15,222,000.= 1.49 |570,000./1,325,000.= 430.18 | |sold/inventory) | | | | |Depreciation/Assets |214,464./3,705,686.= 0.0578= |15,139,000./324,800,000.= 4.66= |1,135,000./31,236,000.= 0.0363= | | |5.78% |0.46% |3.6% | |Depreciation/Sales |214,464./1,300,000.= .01649= |15,139,000./3,287,671=4,604.77 |1,135,000./846,000.= 1.34= 134 | | |16.49% | | | |Income/Assets |36,676./3,705,686.= 9.89= .98% |2,242,000./324,800,000.= .69% |757,000./31,236,000.= 0.024= 2.42%| *numbers expressed in thousands Exhibit 4: Financial Leverage Ratios |Total Debt to Asset Ratio (total debt/total assets) | | |Debt |Asset |Output | |Barnes & Noble |360,400 |3,705,686 |9.725595 | |Progress Energy |13,008,000 |31,236,000 |41.64426 | |Toyota Motor Co |1,400,450,000 |324,800,000 |431.173 | |Long-Term Debt to Assets Ratio (long-term debt/total assets) | | |LTD |Asset |Output | |Barnes & Noble |260,400 |3,705,686 |39.96372 | |Progress Energy |12,272,000 |31,236,000 |39.288 | |Toyota Motor Co |75,079,000 |324,800,000 |23.11546 | |Debt to Equity Ratio (total debt/total shareholders’ equity) | | |Debt |TSE |Output | |Barnes & Noble |360,400 |901,818 |39.96372 | |Progress Energy |13,008,000 |9,542,000 |136.3236 | |Toyota Motor Co |1,400,450,000 |110,870,000 |1263.146 | |Times-Interest Coverage Ratio (earnings before interest& taxes/Interest) | | |Earnings |Interest |Output | |Barnes & Noble |45,009 |0 |0 | |Progress Energy |3,477,000 |358,000 |971.2291 | |Toyota Motor Co |1,955,000 |718,000 |272.2841 | Exhibit 5: DuPont Ratios, Return on Equity (2010 and 2009 Data) |COMPANY |NET PROFIT MARGIN |ASSET TURNOVER |EQUITY MULTIPLIER |DUPONT RATIO (ROE) | |BARNES&NOBLE |.006311952 |1.568013048 |4.020866 |3.98% | |TOYOTA |.010786521 |.639938424 |3.188534 |2.20% | 2009 DATA |COMPANY |NET PROFIT |ASSET TURNOVER |ASSEST TURNOVER % |EQUITY MULTIPLIER |DUPONT RATIO (ROE)|DUPONT RATIO %| |PROGRESS ENERGY |.076580678 |.316461775 |31.65% |3.273528 |.079333473 |7.93% | | | | | | | | | |BARNES&NOBLE |.013065857 |2.01905441 |201.91% |.082377 |.002173167 |.22% | | | | | | | | | |TOYOTA |-.02128438 |.706402936 |70.64% |2.888529 |-.04343003 |-4.34% | | | | | | | | |