ACC M115 Lecture Notes - Lecture 3: Retained Earnings, Financial Statement, Accounts Payable
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1. Apply to actual companies the basic knowledge and analytical techniques learned from our course.
2. Prepare common-size financial statements, comparative financial statements, and various profitability and risk ratios.
3. Compare the calculated results with competitors and across different years.
4. Summarize the analyses and make investment recommendations.
You will be analyzing the following firms:
Williams-Sonoma, Inc.
Pier 1 Imports, Inc.
For these firms, download the most recent annual report (10-K report) to begin your work. In 10-K reports, you can find companiesâ basic information, financial statements, footnotes to the financials, and the management discussions and analyses. Please download the 10-K reports from the following web links:
10-K reports (fiscal year 2016) for Williams-Sonoma, Inc.
https://www.sec.gov/Archives/edgar/data/719955/000119312517104341/d265187d10k.htm
10-K reports (fiscal year 2015) for Williams-Sonoma, Inc.
https://www.sec.gov/Archives/edgar/data/719955/000119312516525847/d120289d10k.htm
10-K reports (fiscal year 2014) for Williams-Sonoma, Inc.
https://www.sec.gov/Archives/edgar/data/719955/000119312515118009/d851953d10k.htm#tx851953_13
10-K reports (fiscal year 2016) for Pier 1 Imports, Inc.
https://www.sec.gov/Archives/edgar/data/278130/000119312517136345/d343458d10k.htm
10-K reports (fiscal year 2015) for Pier 1 Imports, Inc.
https://www.sec.gov/Archives/edgar/data/278130/000119312516556025/d133529d10k.htm
10-K reports (fiscal year 2014) for Pier 1 Imports, Inc.
https://www.sec.gov/Archives/edgar/data/278130/000119312515153179/d881010d10k.htm#toc881010_13
For your convenience, I also provided the balance sheet and income statement of each company for the most recent years at the end (page 5-8; Table 1-4). Please use them to prepare common-size financial statements and comparative financial statements.
Guidance
The required tasks are detailed below:
(1) Prepare common-size balance sheets and income statements for both companies. Note: Compute for the most recent THREE years.
(2) Prepare comparative analysis (i.e., change of percentage analysis) on income statement and balance sheet for both companies. You should compute for the most recent THREE years.
(3) Prepare ratio analyses (for the same THREE year time period) for both companies. At least, you should include the following ratios in your computations: (1) current ratio, (2) acid-test ratio, (3) receivables turnover, (4) inventory turnover, (5) asset turnover, (6) profit margin on sales, (7) rate of return on assets, (8) rate of return on common stock equity, (9) earnings per share, (10) payout ratio, (11) debt to total assets ratio, (12) times interest earned, (13) cash debt coverage ratio, and (14) book value per share.
(4) Comment on the analytical results of the two companies. Your comments should concentrate on the trends across the companies. In addition to contrasting the ratios between the companies, you should interpret the numbers and make suggestions as to why the ratio of one company might be higher/lower than the other.
(5) Write a conclusive summary on the firms you have studied. Based upon your conclusions, recommend the better performing firm for potential investment. Your conclusions should be based upon, and specifically reference, the analyses prepared in this report.
(6) Read sample project to get some ideas.
Report Format Requirements:
A. Report body requirements:
Cover page. List the title of the project, your names, and semester/year.
Abstract or Executive Summary. This is a separate page. It should cover the purpose of the project, the major findings, and the conclusions/recommendations, in summary form.
Table of Contents.
Main body. Use the following sequence for report content:
Introduction to the two companies and to the purpose of the report
Analytical section. This should include all your numerical analyses. This is where you will discuss the results of, comments on, and conclusions about the vertical and horizontal common-size statements, comparative analysis (i.e., change of percentage analysis), and the ratio analyses for both companies.
Comparisons of companies and all other analysis (observations and/or interpretations). (You may combine b and c if you wish, as long as both are well covered.)
Conclusions and recommendation for investment.
References. List all major reference sources.
Appendices. Include tables and graphs of your numerical analyses. For reference convenience, assign a title to each separate item, such as Table 1, Exhibit 1, etc.
B. Typesetting requirements:
Use size 12 font. Times New Roman is preferred.
Double space between lines.
Number pages in accordance with the APA style guide.
One inch on all sides.
Do not right justify text. Use left justify.
Minimum length: 8 pages. (Note: You can easily meet the minimum length requirement since you will have a lot of tables in the paper.)
The submitted work should be in ONE file with a word or pdf format. An Excel spreadsheet file is NOT acceptable.
Plagiarism
Plagiarism will not be tolerated. Evidence of plagiarism will result in a grade of âFâ to the course and be subject to appropriate disciplines.
NOTES:
A portion of your grade will be assessed based on the overall report quality, clarity, format, and cohesiveness.
A FREE RIDER in the group will not be tolerated. However, to report an alleged free rider, you should send me a formal written complaint. You should carefully manage your group over the semester to ensure that no teammate will take the chance of turning into a free rider. Try to contact/manage your teammates frequently and inform me if any member is not willing to participate the group work so we can address this issue ASAP. A free rider will receive his/her group project grades solely based on what he/she has contributed to the projects. If there is a free-rider in your group or a member drops the class, the rest of the group members are still expected to submit a COMPLETE paper.
Again, the balance sheet and income statements are provided at the end. Please use them to prepare common-size and comparative financial statements.
Table 1. Williams-Sonoma, Inc ----Balance Sheet
Williams-Sonoma, Inc. | ||||
BALANCE SHEET | ||||
Fiscal Years 2016, 2015, 2014, 2013 | ||||
(In thousands) | FY 2016 | FY 2015 | FY 2014 | FY 2013 |
ASSETS | ||||
Current assets | ||||
Cash and cash equivalents | $ 213,713 | $ 193,647 | $ 222,927 | 330121 |
Restricted cash | â | â | â | 14289 |
Accounts receivable, net | 88,803 | 79,304 | 67,465 | 60,330 |
Merchandise inventories, net | 977,505 | 978,138 | 887,701 | 813,160 |
Prepaid catalog expenses | 23,625 | 28,919 | 33,942 | 33,556 |
Prepaid expenses | 52,882 | 44,654 | 36,265 | 35,309 |
Deferred income taxes, net | â | â | 130,618 | 121,486 |
Other assets | 10,652 | 11,438 | 13,005 | 10,852 |
Total current assets | 1,367,180 | 1,336,100 | 1,391,923 | 1,419,103 |
Property and equipment, net | 923,283 | 886,813 | 883,012 | 849,293 |
Deferred income taxes, net | 135,238 | 141,784 | 4,265 | 13,824 |
Other assets, net | 51,178 | 52,730 | 51,077 | 54,514 |
Total assets | $ 2,476,879 | $ 2,417,427 | $ 2,330,277 | 2,336,734 |
LIABILITIES AND STOCKHOLDERSâ EQUITY | ||||
Current liabilities | ||||
Accounts payable | $ 453,710 | $ 447,412 | $ 397,037 | 404791 |
Accrued salaries, benefits and other liabilities | 130,187 | 127,122 | 136,012 | 138,181 |
Customer deposits | 294,276 | 296,827 | 261,679 | 228,193 |
Income taxes payable | 23,245 | 67,052 | 32,488 | 49,365 |
Current portion of long-term debt | â | â | 1,968 | 1,785 |
Other liabilities | 59,838 | 58,014 | 46,764 | 38,781 |
Total current liabilities | 961,256 | 996,427 | 875,948 | 861,096 |
Deferred rent and lease incentives | 196,188 | 173,061 | 166,925 | 157,856 |
Long-term debt | 1,968 | |||
Other long-term obligations | 71,215 | 49,713 | 62,698 | 59,812 |
Total liabilities | 1,228,659 | 1,219,201 | 1,105,571 | 1,080,732 |
Stockholdersâ equity | ||||
Preferred stock: $.01 par value; 7,500 shares authorized; none issued | â | â | â | 0 |
Common stock: $.01 par value; 253,125 shares authorized; | ||||
87,325 and 89,563 shares issued and outstanding at | 873 | 896 | 919 | 941 |
January 29, 2017 and January 31, 2016, respectively | ||||
Additional paid-in capital | 556,928 | 541,307 | 527,261 | 522,595 |
Retained earnings | 701,702 | 668,545 | 701,214 | 729,043 |
Accumulated other comprehensive loss | (9,903) | (10,616) | (2,548) | 6524 |
Treasury stock â at cost: 20 and 29 shares as of January 29, 2017 and January 31, 2016, respectively | (1,380) | (1,906) | (2,140) | (3,101) |
Total stockholdersâ equity | 1,248,220 | 1,198,226 | 1,224,706 | 1,256,002 |
Total liabilities and stockholdersâ equity | $ 2,476,879 | $ 2,417,427 | $ 2,330,277 | 2,336,734 |
Table 2. Williams-Sonoma, Inc --- Statement of Income
Williams-Sonoma, Inc. | ||||
STATEMENT OF INCOME | ||||
Fiscal Years 2016, 2015, 2014,2013 | ||||
(In thousands) | FY 2016 | FY 2015 | FY 2014 | FY 2013 |
E-commerce net revenues | $ 2,633,602 | $ 2,522,580 | $ 2,370,694 | $ 2,115,022 |
Retail net revenues | 2,450,210 | 2,453,510 | 2,328,025 | 2,272,867 |
Net revenues | 5,083,812 | 4,976,090 | 4,698,719 | 4,387,889 |
Cost of goods sold | 3,200,502 | 3,131,876 | 2,898,215 | 2,683,673 |
Gross profit | 1,883,310 | 1,844,214 | 1,800,504 | 1,704,216 |
Selling, general and administrative expenses | 1,410,711 | 1,355,580 | 1,298,239 | 1,252,118 |
Operating income | 472,599 | 488,634 | 502,265 | 452,098 |
Interest (income) expense, net | 688 | 627 | 62 | (584) |
Earnings before income taxes | 471,911 | 488,007 | 502,203 | 452,682 |
Income taxes | 166,524 | 177,939 | 193,349 | 173,780 |
Net earnings | $ 305,387 | $ 310,068 | $ 308,854 | $ 278,902 |
QUESTION 6
Which of the following statements is not true regarding prepaidexpenses?
Prepaid expenses represent assets. | ||
Prepaid expenses are shown in a special section of the incomestatement. | ||
Prepaid expenses become expenses only as goods or services areused up. | ||
Prepaid expenses appear in the balance sheet. |
4 points
QUESTION 7
The balance of an unearned revenue account:
Appears in the balance sheet as a component of stockholders'equity. | ||
Appears in the income statement along with other revenueaccounts. | ||
Appears in a separate section of the income statement forrevenue not yet earned. | ||
Appears in the liability section of the balance sheet. |
4 points
QUESTION 8
As of January 31, Hudson Corporation owes $600 to U-Rent-It forequipment used during January. If no adjustment is made for thisitem at January 31, how will Hudson's financial statements beaffected?
Cash will be overstated at January 31. | ||
Net income for January will be overstated. | ||
Stockholders' equity will be understated. | ||
The financial statements will be accurate since the $600 doesnot have to be paid yet. |
4 points
QUESTION 9
The accountant for the Linville Company forgot to make anadjusting entry to record revenue earned but not yet billed tocustomers. The effect of this error is:
An overstatement of assets. | ||
An overstatement of stockholders' equity. | ||
Understatement of both assets and stockholders' equity | ||
Overstatement of both assets and stockholders' equity. |
4 points
QUESTION 10
An adjusting entry involving recognition of unrecorded revenueis necessary at the end of March in which of the followingsituations?
Financial Consultants received payment in February forconsulting services rendered in March. | ||
Financial Consultants began working for a client on March 15;bills will be sent monthly beginning April 15. | ||
Financial Consultants made payment in January for office rentfor the first three months of the year. | ||
On March 31, a major customer paid his bill for a consulting jobcompleted in February. |
4 points
QUESTION 11
Which of the following entries causes an immediate decrease inassets and in stockholders' equity?
The entry to record depreciation expense. | ||
The entry to record revenue earned but not yet received. | ||
The entry to record the earned portion of rent received inadvance. | ||
The entry to record accrued wages payable. |
4 points
QUESTION 12
The CPA firm auditing Greer Company found that net income hadbeen overstated. Which of the following errors could be thecause?
Failure to record depreciation expense for the period. | ||
No entry made to record purchase of land for cash on the lastday of the year. | ||
Failure to record payment of an account payable on the last dayof the year. | ||
Failure to make an adjusting entry to record revenue which hadbeen earned but not yet billed to customers. |