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Evaluate at least (2) factors that make financial statementanalysis essential to management, investors, and creditors. Providea rationale for your response.

Imagine you are considering investing in a corporation. Examinethe key information you would look for in a company’s financialstatements and explain why this information would be important toyou. Suggest at least two (2) financial statement analysis toolsyou would use to evaluate this company’s financial statements.Provide a rationale for your suggestions.

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Sixta Kovacek
Sixta KovacekLv2
28 Sep 2019

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Assignment 2: You Are an InvestmentAnalyst
Due Week 10 and worth 250 points

As the CFO of your corporation, you are in charge of preparing andanalyzing financial statements that will be presented to potentialinvestors and creditors. However, before you can present thefinancial statements to investors and creditors, you need toprepare the financial statements with supporting analysis. Selectone (1) pair of the following companies to conduct your financialstatement analysis.

Pepsi versus Coca Cola, or

Amazon versus eBay

Target versus Walmart

Nike versus Reebok

Write a six to eight (6-8) page paper in which you:

1) Analyze each company’s history, product / services, majorcustomers, major suppliers, and leadership, and provide a synopsisof each company.

2) Identify three (3) profitability ratios that creditors may beinterested in. Calculate the ratio for each company, and prepare areport to summarize your findings on the financial health of eachcompany. Also, recommend to management the manner in which they canimprove each of the three (3) ratios identified.

3) Summarize at least two (2) news events (this may includemergers, acquisitions, or political issues) that occurred from 2012to the present day, and analyze the impact that these events had oneach company’s financial statements. Indicate the primary way inwhich the merger, acquisition or political issues influencepotential investors’ and creditors’ perception of bothcompanies.

4) Analyze each company’s income statement over the past two (2)years, and determine which company outperformed the other. Suggesta way in which the lagging company can improve its income. Supportyour suggestion with a specific analysis.

5) Analyze each company’s balance sheet. Prepare a verticalanalysis for each company, interpret the results, and write afinancial report. Also, suggest the manner in which the companythat is not performing well can improve its balance sheet in orderfor it to be attractive to potential investors.

6) Use at least four (4) quality academic resources in thisassignment. Note: Wikipedia and other Websites donot qualify as academic resources. PLEASE INCLUDE THE WEBSITES USEDFOR INFORMATION.

Take a look at Case 8.1 and answer the following questions:

Case 8.1 Audit Adjustments:

You are a CPA on the audit staff of a multinational publicaccounting firm. You are the senior auditor on an annual audit of amanufacturing company that is a small subsidiary of a largercompany that is a significant client of your firm. In addition to asizable fee for the annual audit, the parent company pays your firmadditional fees each year for tax consultation and returnpreparation as well as other management consulting services. Withthis particular audit, as with many parent-subsidiaryrelationships, you are aware that there is a tremendous amount ofpressure on the subsidiary company’s management to reach certainprojected sales goals for the year. Because of this, the climate atthe subsidiary is tense as you begin your annual examination of theyear-end financial statements. During the course of the audit, youperform a sales cutoff test to ensure that all sales transactionsat year-end were recorded in the proper period. Since title to thecompany’s products passes when they are shipped to customers,shipments are required in order for a sale to be properly recorded.Accordingly, a standard audit procedure is to cross-reference salesrecorded prior to year-end to related shipping records to salesjournals. The sales cutoff test revealed that numerous shipmentsmade after the company’s year-end were recorded as sales prior toyear-end, which resulted in significantly higher revenue during theyear you are auditing. You are aware that as an independentauditor, you have a responsibility to your clients and to those whomight make decisions based on the company’s financial statement,such as investors and lenders. When you inform the subsidiary’scontroller of the results of your sales cutoff test and that anadjustment to annual revenues and profits would likely bewarranted, he takes the matter to the president of the subsidiary.During a follow-up meeting with the controller and president, thepresident attempts to get you to reconsider your proposedadjustment with the following arguments.

1) The amount of the adjustment you were proposing was notmaterial to the parent company’s financial statement.

2) All of the subsidiary’s competitors did the same thing inrecording shipments just after year-end as sales in the previousyear.

3) It really didn’t matter in the long run if sales were movedfrom the current year to the next year, since sales and profits forthe next year would be greater> At the end of the meeting, thepresident drops a not-so-subtle reminder that his company is asubstantial client of the firm. You call the partner from your firmwho is in charge of the audit for advice, and he tells you tohandle the situation on your own. After considering all factors,you continue to feel that an adjustment to the company’s financialstatements is warranted, but after a meeting with the clientattended by your senior partner on the audit (and not attended byyou) you are instructed by the senior partner not to make theadjustment.

How should you react?

Question answer should address these issues – This calls for ananalysis that appreciates the complexity of the auditor’s role.

The well written answer will address the following points: Theauditor and the auditor’s firm has to recognize that its ownfinancial survival may be dependent in part on continuedsatisfactory work in the eyes of the client/subsidiary as well asthat of the subsidiary’s parent corporation.

The auditor will have to reconcile professional and satisfactoryservice with the responsibility of the auditor to report accuratelyand to attest to proper accounting standards within the reportingsystem of the subsidiary.

The auditor will be subject to professional discipline and civilliability if the auditor fails to honor professional standards ofconduct and of fiduciary duties.

As a practical matter, and as an interpretive artist, theauditor need not either comply with the senior partner or quit…

Information can be honestly presented in a fashion that iscandid, such as through footnoting, while still presenting apicture that might me closer to the expectations of the client. Ofcourse, there is a large potential for disingenuousness in such anapproach.

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