FINANCIAL STATEMENTS INTERNET PROJECT
This project will lead you through the financial statements of several companies to give you a look at some similarities and differences in real-life financial reporting. You will look at selected ratios and other aspects of the statements for all of the companies, and at specific items for each of them. You may quote the statements, but make sure you don’t plagiarize – i.e., if you copy, use quotation marks. Page numbers refer to the actual page number in the Annual Report or 10-K, not to the Adobe Acrobat page number at the bottom of the Acrobat reader. The page numbers will often be close, but may not be exactly the same.
1. Boeing Co.
To get you started, one way to find the 2004 financial statements is to click as follows:
www.Boeing.com
Investor Relations
Current Annual Report
Financials
(If you want to see what used to be the front half of most
annual reports, start through any of the pull-down menus other than financials or download the full PDF version. For most of the questions, choose from the appropriate item under the Financials pull-down menu.)
A. Who is the company’s independent auditor? Does the auditor believe that the statements give a fair representation of what they claim to report (i.e., do the auditors give the company a “clean opinion”)?
B. In the course of this project we will look at some of the ratios commonly used in financial analysis. I will provide a short explanation for each ratio here. For an extended explanation of the ratio you can refer to the discussion in Chapter 9 of your text. One ratio is the profit margin percentage ratio, also known simply as the profit margin (Exhibit 9-11, p. 268). It shows what percentage of sales is retained as profit after all expenses. What is Boeing’s profit margin percentage ratio for 2004? The total asset turnover (Exhibit 9-10, p. 267) ratio indicates how many dollars of sales the company generates for every dollar of investment in assets, which is one measure of the efficiency of usage of assets. What is Boeing’s total asset turnover ratio? The debt to total assets ratio shows what proportion of total financing is debt financing. Since debt financing has fixed payments while equity financing does not, debt financing is considered riskier. The current ratio provides a measure of short-term risk in that it shows how many dollars of current assets it has to cover each dollar of current liabilities. In general, the lower the current ratio, the higher the risk that the company might not be able to pay its bills in the short run (lower liquidity. What are the debt to total assets ratio and current ratios for 2004? Accounts receivable and inventory each make up about 8% of Boeing’s total assets. What is Boeing’s age of inventory? This indicates how long it takes, on average, to sell a dollar’s worth of inventory, and thus serves as a measure of the liquidity (closeness to cash) of the inventory. Does this number, along with the current ratio, make you feel confident about Boeing’s liquidity? Does Boeing give a total liabilities number? If not, is there a quick way to determine total liabilities (think of the accounting equation)?
C. Look at the Statement of Cash Flows for 2004. The statement is divided into three major sections: Cash Flows – Operating Activities, Cash Flows – Investing Activities, and Cash Flows – Financing Activities. Did Boeing generate enough cash from its operating activities to pay for its investing and financing activities in 2004? Where did the cash come from to allow Boeing to conduct its investing and financing activities in 2004 (section and individual item)?
D. Look at the notes following the financial statements. From Notes 1 (page 59 of the annual report) and 8 (page 67), does Boeing seem to use any of the standard cost flow assumptions? If not, can you say why not?
E. From note 6 (page 65), what was Boeing’s effective tax rate for 2004? What were the three primary reasons that it was different from the statutory rate? what does the negative number in the bottom line of this chart for 2003 mean?
F. Look at note 24 (page 88). This note reports results by segment of the business. For this note, the company is supposed to define the segments in the same way that it does for internal management and planning purposes. How many segments does Boeing have and what are they?
G. Note 16 (beginning page 75) is about Boeing's post-retirement benefit plans for employees. The first chart summarizes the changes in “benefit obligation” (actuarial present value of promised future benefits) and “plan assets” (investments in a special fund for paying benefits when they come due). If a plan has assets in excess of its benefit obligation, it is said to be overfunded. If the assets are less than the obligation, it is said to be underfunded. What is the “funded status” (overfunded or underfunded) of Boeing's pension benefits plan for 2004? Does this appear to be the same amount that is recognized on its balance sheet (‘net amount recognized”)? Does the number recognized on the balance sheet provide a good representation of the underlying economic status of Boeing’s pension plans (note that the way the last two sections of the chart are presented, parentheses represent a liability and no parentheses represents an asset balance)?
2. CIGNA
www.Cigna.com
Investor Relations
Most Recent Disclosures
2004 Annual Report
A. Go to the Management’s Discussion and Analysis section (in the financial section before the financial statements). MD&A is mandated by the SEC and contains extensive disclosures about managements’ interpretation and explanation of financial results. From the Overview section (pages 18-21) why did 2004 Net Income exceed that of 2003? What does Cigna expect to happen to income in 2005, and why (briefly)?
B. Who is CIGNA’s auditor (“independent accountant”). Did CIGNA get a clean opinion? Who does the “Report of Management” say is responsible for the financial statements?
C. What is CIGNA’s profit margin percentage ratio for 2004? What is its total asset turnover ratio? What is the debt to total assets ratio? Compare CIGNA’s debt to total assets ratio to Boeing’s. Is CIGNA significantly riskier than Boeing? Is this a fair comparison? Why or why not? Can you calculate CIGNA’s current ratio for 2004? Comment.
D. Look at the notes to the financial statements. Note 13 (starting page 64) is CIGNA’s Income Taxes note. Look at the last chart in the note. This is the same information as that in the Boeing chart. does Cigna seem to pay the statutory (“nominal”) 35% rate on its taxable income during the three-year period reported? Can you convert to get the effective tax rate for comparison with Boeing? (Hint: you will need some information from the Income Statement.) How do they compare?
E. Note 15 is about CIGNA’s post-retirement benefit plans for employees. The first chart summarizes the “benefit obligation” (actuarial present value of promised future benefits) and “plan assets” (investments in a special fund for paying benefits when they come due). Recall from the Boeing analysis that if a plan has assets in excess of its benefit obligation, it is said to be overfunded. If the assets are less than the obligation, it is said to be underfunded. What is the “funded status” (overfunded or underfunded) of CIGNA’s pension benefits plan for 2004? Does this appear to be the same amount it has recognized on its balance sheet? The Plan assets part of the chart gives the actual return on plan assets. In the middle of the left-hand column on page 61 (near the end of the note) you will find a chart giving the assumptions used in calculating amounts for the first chart. How does the expected [rate of] return on plan assets (for projected benefit obligation) compare to the actual rate of return on plan assets (use the beginning balance and the actual return in the first chart to calculate the actual rate of return)? GAAP specifies that the company use the expected rate as a reduction in calculating pension expense. Does this seem realistic?
F. Look at note 20 (starting p.64 of the annual report). This note reports results by segment of the business. For this note, the company is supposed to define the segments in the same way that it does for internal management and planning purposes. How many segments does CIGNA have, what are they, and on what basis does it break them down (i.e., business activity or geographical) (ignore corporate)?
3. DELL COMPUTER CORPORATION
To get you started, another way to find the financial statements and notes is to proceed as follows:
For this part we will use a different route to accessing a slightly different statement. While the Annual Report is the document that the company distributes to shareholders and other investors, it must submit a somewhat expanded document to the SEC called the Form 10-K. This 10-K is actually more reliable, since some companies use a condensed or ‘simplified’ Annual Report (authorized by the SEC in the 1980s in response to companies’ and auditors’ claims that investors were too stupid to read the regular Annual Report, but were smart enough to read one that still had footnotes but left out some of the information). 10-Ks must be filed with the SEC annually in electronic format (currently mostly html) and are available in raw form on the SEC EDGAR website. Most companies also provide the 10-Ks and other SEC filings on their own websites, often in Adobe Acrobat (.pdf) format. We are going to use the Adobe format provided by Dell.
(in the upper right-hand corner of the home page) About Dell
Investors
Dell Files Form 10-K, FY05
When the 10-K appears in the Acrobat reader, you will see a Bookmarks panel on the left (if not, click on the Bookmarks tab at the left of the Acrobat window to open the panel). Scroll down the Bookmarks list until you get to Part 1, Item 8. This will give you the Auditor’s Report, Financial Statements, and Footnotes. The MD&A and other information from the Financial section of the Annual Report are in Items 6-7A.
A. Who is the company’s independent auditor? Does the auditor believe that the statements give a fair representation of what they claim to report (i.e., do the auditors give the company a “clean opinion”)?
B. This is the FY 2005 10-K for Dell. How can the 2005 Annual Report be available in April, 2005? What year’s operations make up the majority of the information for the current-year column of the statements? To what year of Boeing’s Annual Reports is the FY2005 Dell report most comparable? What is Dell’s profit margin percentage ratio for FY 2005? What is its total asset turnover ratio? Does Dell give a total liabilities number? What are the debt to total assets ratio and current ratio for FY 2005? What is Dell’s age of inventory? How can it be so much lower than Boeing’s? How does Dell compare to the other two companies on all these dimensions?
C. Look at the Statement of Cash Flows for FY 2005 (page 38). Did Dell generate enough cash from its operations to pay for its investing activities? How about in FY 2004? What was Dell's primary use for its "free cash flow?" (= Net cash provided by operating activities – Net cash used in investing activities) in FY 2005? How about in the previous two fiscal years? Given this activity, what would you expect to have happened to Dell’s number of shares outstanding? Check the Shares columns under Common Stock (first column) and under Treasury Stock (third column) on the Consolidated Statement of Stockholders’ Equity (page 39). Remember that the number of shares outstanding is equal to the number of shares issued minus the number of shares of treasury stock. What was the actual change in shares outstanding from the end of FY 2004 to the end of FY 2005?
D. Look at the notes following the financial statements. From Note 1 (page 40), what inventory cost flow assumptions does Dell use? Is this surprising given their business? From note 3, what was Dell’s effective tax rate for FY 2005? What was the primary reason that it was different from the statutory rate? If you were predicting Dell’s earnings for 2006, what tax rate would you use?
E. Look at note 9 (page 54). This note reports results by segment of the business. For this note, the company is supposed to define the segments in the same way that it does for internal management and planning purposes. How many segments does Dell have and what are they? Does Dell seem to define its segments on the same basis as the other companies in this project?
F. Note 7 (page 52) is about Dell’s accounting for its basic and extended warranties. When does Dell recognize revenue from customer payments for extended warranties?
G. You may find it interesting to glance through some of the other sections of the 10-K to see what information it provides in addition to the annual report (nothing to turn in for this one).
No comments:
Post a Comment