ACCT 2101 : Final Exam Knowledge Guide 1
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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 |
Capital Budgeting Case Study
Instructions: The assignment is based onthe case below. The instruction relating to the assignment is atthe end of the case.
Dan and Susan are facing an important decision. After havingdiscussed different financial scenarios, the two computer engineersfelt it was time to finalize their cash flow projections and moveto the next stage â decide which of two possible projects theyshould undertake.
Both had a bachelor degree in engineering and had put in severalyears as maintenance engineers in a large chip manufacturingcompany. About six months ago, they were able to exercise theirfirst stock options. That was when they decided to quit their safe,steady job and pursue their dreams of starting a venture of theirown. In their spare time, almost as a hobby, they had beencollaborating on some research into a new chip that could speed upcertain specialized tasks by as much as 25%. At this point, thedesign of the chip was complete. While further experimentationmight improve the performance of their design, any delay inentering the market now may prove to be costly, as one of theestablished players might introduce a similar product of their own.The duo knew that now was the time to act if at all.
They estimated that they would need to spend about $1,000,000 onplant, equipment and supplies. As for future cash flows, they feltthat the right strategy at least for the first year would be tosell their product at dirt-cheap prices in order to induce customeracceptance. Then, once the product had established a name foritself, the price could be raised. By the end of the fifth year,their product in its current form was likely to be obsolete.However, the innovative approach that they had devised and patentedcould be sold to a larger chip manufacturer for a decent sum.Accordingly, the two budding entrepreneurs estimated the cash flowsfor this project (call it Project A) as follows:
Year | Project A Expected Cash flows ($) |
0 | (1,000,000) |
1 | 50,000 |
2 | 200,000 |
3 | 600,000 |
4 | 1,000,000 |
5 | 1,500,000 |
An alternative to pursuing this project would be to immediatelysell the patent for their innovative chip design to one of theestablished chip makers. They estimated that they would receivearound $200,000 for this. It would probably not be reasonable toexpect much more as neither their product nor their innovativeapproach had a track record.
They could then invest in some plant and equipment that wouldtest silicon wafers for zircon content before the wafers were usedto make chips. Too much zircon would affect the long-termperformance of the chips. The task of checking the level of zirconwas currently being performed by chip makers themselves. However,many of them, especially the smaller ones, did not have thecapacity to permit 100% checking. Most tested only a sample of thewafers they received.
Dan and Susan were confident that they could persuade at leastsome of the chip makers to outsource this function to them. Byexclusively specializing in this task, their little company wouldbe able to slash costs by more than half, and thus allow the chipmanufacturers to go in for 100% quality check for roughly the samecost as what they were incurring for a partial quality check today.The life of this project too (call it project B) is expected to beonly about five years.
The initial investment for this project is estimated at $1,100,000. After taking into account the sale of their patent, thenet investment would be $900,000. As for the future, Dan and Susanwere pretty sure that there would be sizable profits in the firstcouple of years. But thereafter, the zircon content problem wouldslowly start to disappear with advancing technology in the waferindustry. Keeping all this in mind, they estimate the cash flowsfor this project as follows:
Year | Project B Expected Cash flows ($) |
0 | ($900,000) |
1 | 650,000 |
2 | 650,000 |
3 | 550,000 |
4 | 300,000 |
5 | 100,000 |
Dan and Susan now need to make their decision. For purposes ofanalysis, they plan to use a required rate of return of 20% forboth projects. Ideally, they would prefer that the project theychoose have a payback period of less than 3.5 years and adiscounted payback period of less than 4 years.
Assignment:
Suppose that Dan and Susan have hired you as a consultant tohelp them make the decision. Please create an official presentationto present your findings and recommendations. The questions belowshould help to guide your insight.
Briefly, summarize the key facts of the case and identify theproblem being faced by our two budding entrepreneurs. In otherwords, what is the decision that they need to make? (10 points)
An excellent presentation will demonstrate the ability toconstruct a clear and insightful problem statement whileidentifying all underlying issues.
What are some approaches that can be used to solve this problem?What are various criteria or metrics that can be used to help makethis decision?
An excellent presentation will propose solutions that aresensitive to all the identified issues.