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INTRODUCTION TO THE CORPORATE ANNUAL
REPORT:
A Business Application with IFRS Content
3rd edition
Copyright 2011 by Applied Accounting Analytics. All rights reserved. Reproduction or
translation of this book beyond that permitted by the applicable copyright law without Applied
Accounting Analytics’ permission is prohibited. Requests for permission to reprint or for further
information should be directed to bstanko@luc.edu or tzeller@luc.edu.
ISBN: 978-0-9841839-2-0
To be completed by the student and submitted with the completed annual
report project according to your instructor’s requirements.
Complete the following form before you submit your assignment. This step is required to
validate your compliance with sections 107 or 108 of the 1976 United States Copyright
Act.
1. Remove the front cover of the workbook and identify:
Student Name:Click here to enter text.
Term:Click here to enter text.
Selected Company:Aaple Inc.
Instructor:Click here to enter text.
2. Print your completed electronic template.
3. Attach the following:


This page completed with all required information.
Completed Word form template. Form template boxes expand as you input
responses.
CHAPTER 1 - INTRODUCTION
Select a Company and Gather Documents
Chapter 1: Select a Company and Gather Documents – Question 1
Identify with an “X”the primary source of data for this project.
Click
here to
Annual report to shareholders
enter
text.
Click
Annual report to shareholders with a letter from Chief Executive Officer
here to
and SEC Form 10-K as part of the annual report to shareholders. The
enter
annual report may include additional general company information.
text.
X
SEC Form 10-K and the company website.
Fill in the page numbers from the annual report where the following are located.
Required information for this
workbook project.
Financial Highlights

Not absolutely necessary, but very
common in annual report to shareholders.

Not in SEC Form 10-K.May be posted on
company website. If so put WEB in Page
No. box.

Page
No.
N/A
Required information for this
workbook project.
Chief Executive Officer Letter

May be labeled President’s, CEO’s or
other top official’s message or letter to the
shareholders

Not in SEC Form 10-K. Likely posted on
company website if SEC Form 10-K used
to satisfy the annual report to shareholders
reporting requirement. If so put WEB in
Page No. box.
If not available, put N/A in Page No. box.
Management’s Discussion and
Analysis (MD&A)
25
Income Statement
May be labeled Statement of Earnings
46
Balance Sheet
May be labeled Statement of Financial Position
47
Page No.
N/A
Notes to Financial Statements

Put range of pages, for example, 47 to 58.
Report of Independent
Accountants or Independent
Auditors’ Report
Five- or Ten-Year Summary of
Operating Results
50 to 78
79
24
Item 6 in SEC Form 10-K
Statement of Change in
Stockholder’s Equity
48
Management’s Report
(Responsibility) on Internal
Control over Financial
Reporting
81
1
Item 9A. Control and Procedures in SEC 10-K
Statement of Cash Flows
49
Investor and Company
Information or Shareholder
Information
83
Identify Why You Selected This Company
Chapter 1: Identify Why You Selected This Company – Question 1
A) What is/are your motivation(s) or interest(s) in selecting this company?
[See above for examples.]
B) What question(s) are you seeking to answer?
[For example, is the company profitable? Can the company change and develop new products
and services to be competitive? Would I invest in this company? Will the company provide
rewarding career opportunities? In chapter 5 you will have pulled together the financial and
nonfinancial information to answer these question(s).]
A) Apple Inc is one of the most reputable and growing organization in technology
sector.Reading the financial statements and other relevant data will help me to increase
my knowledge base and will improve my skills to analyse financial data for an
organization in technology sector.
B)I would be answering questions such as product growth of apple inc.Along with that I
would be seeking information regarding the profitability of its products.Business
strategy of apple inc will also be a part of the question that will be answered after
reading this report.
Company and Annual Report Essentials
Chapter 1: Company and Annual Report Essentials – Question 1
What is the company’s complete name?
APPLE INC
Chapter 1: Company and Annual Report Essentials – Question 2
What is the address of your company’s corporate headquarters?
ONE INFINITE LOOP
CUPERTINO, CA 95014
2
Chapter 1: Company and Annual Report Essentials – Question 3
Identify the company’s website address.
www.apple.com
Chapter 1: Company and Annual Report Essentials – Question 4
Identify the telephone number and e-mail address of the company’s Investor Relations
Department.
Telephone number:(408) 974-3123
E-mail address:(http://investor.apple.com/contactUs.cfm) no email address is
available.they have an online investor relation contact link where any one can post their
queries.
Chapter 1: Company and Annual Report Essentials – Question 5
Which stock exchange lists your company?
The NASDAQ Stock Market LLC
Chapter 1: Company and Annual Report Essentials – Question 6
What is your company’s stock exchange trading symbol?
AAPL
Chapter 1: Company and Annual Report Essentials – Question 7
What is your company’s Standard Industrial Classification (SIC) and sector? Run a
search on “Standard Industrial Classification,” and the classification and code will be
identified. Your company may list more than one SIC code number. The first listed is
considered the primary SIC for the company.
For example, search – The Home Depot SIC – brings up a listing of sources. InvestorWords is
one website location option - http://www.investorwords.com/cgibin/stocksymbol.cgi?ticker=HD. Move down the page and you will find:
SIC Code: 5211
Sector: Basic Materials, Construction, Retail
Industry: Lumber and other building materials
3
3571 - Electronic Computers
Chapter 1: Company and Annual Report Essentials – Question 8
Locate the board of directors listing. How many board members does your company
have?
Apple have eight board members
Chapter 1: Company and Annual Report Essentials – Question 9
How many of the directors are company employees, labeled inside directors? And how
many are non-company directors, labeled outside directors? Why does a company want
and need outside directors?
(Inside and outside directors are typically identified as such by their title and company.)
Apple has only one inside board member who is the CEO and Director.all the other 7
directors are the outside directors.A company needs outside directors to comply with the
Corporate governance requirements which states that Board of every company
complying with CCG requirements should comprise of atleast 3 independent (outside)
directors.
Chapter 1: Company and Annual Report Essentials – Question 10
Leadership addresses the stockholders, typically, once a year at the annual stockholders
meeting. Identify where and when this occurred, as reported in your annual report.
It has been conducted in Building 4 of the Company’s principal executive offices on
Friday 27, 2013
Company Strategy and Business Environment
Chapter 1: Company Strategy and Business Environment – Question 1
Review the chairman’s message of your company’s annual report. Does it appear to be
uplifting or somewhat apologetic? Identify phrases that support your position.
In business strategy section management is much confident about their innovative
techniques to launch new products .Their enthusiasm and focus on providing best user
experience indicates their confidence in apple’s products and its continuous growth
Chapter 1: Company Strategy and Business Environment – Question 2
Check below the one primary company strategy identified in the chairman’s message.
Support your answer with phrases found in the chairman’s message that pointed you to
4
the identified corporate strategy.
Growth: VerticalClick here to enter text.
HorizontalClick here to enter text.
ConcentricApple is focusing on concentric growth straegty because they are working in
industires with same technological synergies such as manufacturing Iphone and getting it sold
via retailers and distributors to gain advantage .
ConglomerateClick here to enter text.
Stability Click here to enter text.
RetrenchmentClick here to enter text.
Phrases to support your above conclusion:
Therefore, the Company’s
strategy also includes enhancing and expanding its own retail and online stores and enhancing its
distrubuton network .
Chapter 1: Company Strategy and Business Environment – Question 3
Briefly summarize the company’s discussion found in Item 1 of SEC Form 10-K.
Type of business:
Manufacturing,desiging and marketing of electornic products and development of
application softwares and operating system.
Major business segments:
Mobile communication,media devises,portable digital music players,software,
services,peripherals as well as networking solutions and digital content and application.
Primary customers:
The Company’s customers are primarily in the consumer, SMB, education, enterprise and government
markets
Primary products and/or services:
Primary products would include iphone,ipad,mac,ipod,itunes and the itunes stores,mac
app stores ,icloud and operating system would include IOs, OS X .Application software
would include Iwork, Ilife .
Other:
One of the important factor that needs to consider with apple is its competition because
apple is operating technology industry which has a very high competition and only those
entities survies that has the ability to beat competition and one can say that apple has
5
that ability to beat all the competition and lead the technology market.Apple has
developed this reputation by spending huge amount in its research and development
which is evident from the fact that the research and development expense is being
increasing from 2011 to 2013.
Chapter 1: Company Strategy and Business Environment – Question 4
Identify broad-based social, political, economic, and technological concerns that may
affect your company. Put N/A if one of the categories does not apply.
Social:
N/A
Political:
Political factors are the factors that will effect any industry so will apple has to consider
political risk such as government’s policies regarding technological sectors as well as
data regulations.Internatioal politics also effects apple’s business because apple operates
worldwide which means that changes in laws and regulation of any country would
impact apple inc sales.
Economic:
Economic conditions plays a vital role in the sales growth of apple incorporation .In
economic crisis the demand for apple’s product will be adversely effected as these are
not considered as a basic needs in most of the countries.One important factor is the price
increment in countires outside us because apple has to increase prices due to the
fluctuations in dollar prices .
Technological:
As mentioned earlier apple inc operates in technological sector which requires rapid
innvovations and product enhancements.technological upgradation would highly impact
consumer demands as people want to buy the latest technology .Shorter product life
cycles and high spending on research and development which if not compensated by
higher prices would reduce apple’s profit margins to unacceptable levels.
Other:
One of the facor that apple depends upon is the performance of its distributors ,carriers
and other resslers.their success will contribute to apple’s overall success and product
growth.If these entites doesnot operate efficenlty it would have a negative impact of
apple’s sales because goods are produced by apple but are handed over to final
consumer by these entities.
Wrap-up
Chapter 1: Wrap-up – Question 1
6
After further review of additional information you should now be confident in
identifying the one primary company strategy, beyond the insight provided by the
chairman’s message?
Check below the one primary company strategy identified in the chairman’s message
and all other supporting documents. Support your answer with phrases.
Growth: VerticalClick here to enter text.
Horizontal Click here to enter text.
ConcentricApple is focusing on cocentirc growth because it is taking advantage of others as most
of the factors in Part 1 indiactes that apple is placing more reliance on third party digital content
stating that apple is enhancing is business by placing reliance onits business partners.It is also
evident from the fact that apple has decided to increase its distributor network as mentioned in
business strategy sections
ConglomerateClick here to enter text.
Stability Click here to enter text.
Retrenchment Click here to enter text.
Phrases to support your conclusion from information gathered from the chairman’s
message, Item 1 of the SEC Form 10-K and other insight gained from completing
Chapter 1.
Therefore, the Company’s
strategy also includes enhancing and expanding its own retail and online stores and its third-party
distribution network to effectively reach more
customers and provide them with a high-quality sales and post-sales support experience.
7
CHAPTER 2 - ANNUAL REPORT STRUCTURE
Financial Highlights
Chapter 2: Financial Highlights – Question 1
Review the financial highlights of your company’s annual report to the shareholders.
Identify net sales or revenues, net income, basic earnings per share (BEPS), and total
assets for the current and preceding years. These are the most common values included
in financial highlights. If your company reports something different, simply cross out an
item here and recap what is reported. SEC Form 10-K does not provide financial
highlights. You may find this information on the company website. If not available put
N/A in the first row of boxes.
Categories
Net sales or revenues
Net income
Basic EPS
Total Assets
Current Year
One Year Prior
Two Years Prior
170,910,000
156,508,000
108,249,000
37,037,000
41,733,000
25,922,000
40.03
44.64
28.05
207,000,000
176,064,000
116,371,000
Based on your preliminary review, is your company performing better than, equal to, or
less favorably than in the prior year? Briefly explain.
Sales has been grown from the prior years however the net income has declined as
compared to the comparitve financial year means that cost has increased more than the
expectations of management.It is evident that the Basic EPS has also decreased due to
reduction in net income.The performance has detoriated slighltiy in terms of cost control
.
General Company and Marketing Information
Chapter 2: General Company and Marketing Information – Question 1
Look for pictures of product and people that are colorful and send a positive company
signal to the reader.
Category
Message
Example: Volunteer
Activities
Ongoing and contributing to the success of the community
Website
No pictures available in annual report however the website
appears to be colorful.It has pictures of different apple
products such as iphone,Ipod,etc which are very lucrative
for the consumers .These pictures also gives an impression
that apple is contributing a lot towards the advancement of
8
technology and bringing in innovative products that will
contribute in the well being of society.
Click here to enter text.
Click here to enter text.
Click here to enter text.
Click here to enter text.
Click here to enter text.
Click here to enter text.
Click here to enter text.
Click here to enter text.
What is the broader message from this information?
Pictures not available in annual report
Management’s Discussion and Analysis
Chapter 2: Management’s Discussion and Analysis – Question 1
Results of Operations:
Identify the primary drivers/issues that explain current and future results of operations
discussed in the MD&A. For example, the gross profit percentage increased because of
improved buyer/supplier relations resulting in greater overall operating performance. Or
an increase in operating expenses because of increased fuel costs reduced profits. List
the six major drivers/issues of performance you find in the MD&A section of the annual
report.
1.Net sales of the company has been increased by 9% as compared to the previous years
the main reason for this growth is the increase in sales of Iphone ,Itunes and other
softwares.
2.Iphone serios inclusing Iphone 5 and 5s as well as Iphone 4 and 4s have contributed
signifacanlty in the growth of Apple inc’s over all sales .however the Ipod and Imac has
not performed as per the expectations and their sales has declined as compared to
previous periods.
3.Similar to 2012, growth in total net sales was higher during the first half of 2013, rising $12.6 billion or
14.7% over the same period in 2012. First half growth in 2013 was driven by iPhone and iPad
introductions at or near the beginning of 2013.
4.2013 has also been a year of launching several new products as mentioned in MD & A
section that company has launched a number of different products include fourth
generation IPad and IPad Mini ,Macbook Pro with retina display ,IOS 7 and a lot more
has been developed and brought to market in 2013
5.Apple has decided to repurchase its shares from their shareholders which is evident
from the fact that they had spend 60 billion to repurchase their shares and have
increased their dividends to 3.05 per share.
6.In conjuction with their capital repurchase program company has also issued various
9
notes in may 2013 amounting to Rs 17 billion with varying maturirites upto 2043
Liquidity:
Recap what you find about your company’s liquidity in the MD&A section of the
annual report. Look for information about the ability of the company to satisfy shortterm cash needs and the ability to generate operating cash flows, for example.
The liquidty position of Apple inc appears to be fine enough because company has
spended 60 million in their repurchase program and also increase their dividend to
share holders indicating that enough cashflows are generated to meet their
requirements.
Capital Resources:
Recap what you find about your company’s capital resources in the MD&A section of
the annual report. Look for information about cash reserves and credit availability. For
example, your company’s MD&A section may have a disclosure about an established
lined of credit to fund future growth.
In conjuction with the capital repurchase program Apple has issued notes of 17 billion
with different maturities ending till 2043.However currently apple has enough
resources which it is planning to invest in rebuying its shares from their shareholders. It
indicates that apple now is deciding to move on debt and reduce their equity portion in
overall capital structure.
Reports by Management
Chapter 2: Reports by Management – Question 1
Review the Management’s Report (Responsibility) on Internal Control over Financial
Reporting in your company’s annual report. Answer the following questions.
Who is responsible for maintaining the
internal controls designed to provide
reasonable assurance that the books and
records reflect the transactions of the
company?
Management of the company is
responsible for designing and maintaining
adequate internal controls over financial
reporting.
Record the statement that identifies
management’s conclusion about internal
controls.
Based on the Company’s assessment, management
has concluded that its
internal control over financial reporting was
effective as of September 28, 2013 to provide
reasonable assurance regarding the reliability of
financial reporting and the preparation of financial
statements in accordance with GAAP.
10
Who audited management’s assessment of
the effectiveness of your company’s
internal control over financial reporting?
The Company’s independent registered public
accounting firm, Ernst & Young LLP, has issued an
audit report on the Company’s internal control over
financial reporting, which appears in
Part II, Item 8 of this Form 10-K.
Independent Auditors’ Report
Chapter 2: Independent Auditors’ Report – Question 1
Review the Independent Auditors’ Report of your company’s annual report and answer
the following questions.
Who was the company’s
auditor and where is it
located?
Ernst & Young LLP
San Jose, California
October 29, 2013
What is the responsibility
of the auditor?
Auditors are responsible to express an opinion on the
company’s internal controls over financial reporting based
on their audit
Who is responsible for the
preparation of and
information within the
company’s financial
statement?
Management of Apple Inc is responsible for the
preparation of information with in the company’s financial
statements.
The audit was conducted
in accordance with what?
It was conducted in accordance with the standards of the Public
What was the opinion of
the auditor?
Auditors have provided an unqualified opinions
Company Accounting Oversight Board (United States).
Five- or Ten-Year Summary of Operating Results
Chapter 2: Five- or Ten-Year Summary of Operating Results – Question 1
Identify the major components provided in the five- or ten-year summary. Summarize
the insight provided by each. Look for stable, increasing, or decreasing trends.
Consistent, slightly improving performance signals management has control of the
business. Inconsistent performance signals management does not have control of the
business.
Component
Summary of Insight
Example: The Home Depot
Statement of Earnings Data
Sales and earnings have grown significantly over time.
Operating expenses are growing at an increasing rate.
Statement of Earnings Data
The sales and earnings have shown significant
improvement in 5 years period. The sale sincrease by
11
around 300% and net earnings increased by around
350%, during the tenure of 5 years period starting 2009
to 2013.B
Balance Sheet Data
Total assets has also shown significant improvement in
5 years period. It went up by around 336%, it is alos in
line with increase in sales, it shows that the increase in
assets has increased the total revenues during 5 years
period, which shows the efficient usage of total assets.
However, the company was free from long term debt
till 2013, the company borrowed $17 billion in 2013 as
long term debt, but it is not very significant. The
increase in shareholders equity is also significant due to
higher earnings and it went up by around 290% since
2009.
Statement of Cash Flows
The increase in cash and cash equivalent is also
significant and it went up by around 359% during 5
years tenue.
Click here to enter text.
Click here to enter text.
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12
CHAPTER 3 - FINANCIAL STATEMENTS
The Balance Sheet
Chapter 3: Balance Sheet – Question 1
Identify the date shown at the top of your selected company’s balance sheet.
Current Year
Prior Year
9/28/2013
9/29/2012
Does the company’s fiscal year follow the calendar year? Enter Yes or No No
If no, why do you think it is different?
Because it ends on Septermber of each year, while the calendar year ends
on Decemeber of each year.
Chapter 3: Balance Sheet – Question 2
Review the current asset section of your selected company’s balance sheet. Explain why
the order of individual items begins with cash. In your opinion, would it be more or less
appropriate to order these items according to dollar magnitude? Explain.
The current assets have been listed according to its ability to convert into cash. The
value in dollar terms is not significant as compared to their ability to convert into cash.
Chapter 3: Balance Sheet – Question 3
Review your company’s balance sheet (or SEC Form 10-K) and compare accumulated
depreciation to the historical cost of Plant and Equipment (PE) using the following ratio.
Compute the following:
Percentage of Asset Life Remaining
Accumulated depreciation /

High percentage means older assets
Plant and Equipment

Low percentage means newer assets
42%
Is the investment in fixed assets, on average, relatively recent? If not, can we assume
that these assets will be replaced shortly?
13
$6.6 billion of property plant and equipment were added during 2013, and the life of
assets remaining percentage also suggests that the fixed assets will not be replaced
shortly.
Chapter 3: Balance Sheet – Question 4
Since property, plant, and equipment (PPE) and long-term investments in stock
represent a company’s investment, why do we distinguish between them in the balance
sheet?
As the property, plant and equipment are the operating fixed assets and they belong to
prmiany business of the company, while the investment in stock is subject to availability
of surplus fund and it does not belong to prmiany business, therefore they are calssified
separately from each other.
Chapter 3: Balance Sheet – Question 5
Review the noncurrent asset section of your company’s balance sheet. Are any
intangible assets listed? If so, identify the types of intangible assets and the percent of
total assets that the intangible assets represent.
Intangible Asset 1:Goodwill $1.6 billion
Intangible Asset 2:Acquired Intangible assets $4.2 billion
Intangible Asset 3:Click here to enter text.
Total Intangible Assets  Total Assets = 5.8/207 = 2.8%
If this company were to be acquired by another company, would the intangible assets
influence the purchase price? Explain your answer.
It depends on the nature of intangible assets and its worth in the market. If the intangible assets
do have any worth in the market then they are included otherwise they are considered as zero,
therefore it will definitely affect the purchase price of the company, if it is sold to some other
company.
Chapter 3: Balance Sheet – Question 6
Now review your company’s total assets for the most recent year. What percentage of
total assets is current? Noncurrent?
Current
35%
14
Noncurrent
65%
Should companies have a greater investment in current assets or noncurrent assets, or
does it depend on the nature of their business? Explain your answer.
The investment in current and non current assets depend on the nature of business, if a business
belongs to service sector it will have lower percentage of non current assets while for a
manufacturing business, the percentage of non current assets would be on higher side due to cost
of heavy plant, equipment and factory.
Chapter 3: Balance Sheet – Question 7
Review your company’s balance sheet. Does it report a deferred tax asset? A deferred
tax liability? If so, are the deferred tax assets and/or liabilities reported as current or
noncurrent?
Deferred tax asset? Enter Yes or No
Enter Current or Non-current
Yes
Current
Deferred tax liability? Enter Yes or NoNo
Enter Current or Non-current
NA
Chapter 3: Balance Sheet – Question 8
Identify the information that relates to the stockholders’ equity section of your
company’s balance sheet.
Par value per share of common stock?
Number of common shares authorized?
No par value
1.8 billion shares
Number of common shares issued?
939.2 million
Number of common shares outstanding?
899.2 million
Number of treasury shares held by the company?
47 million
Chapter 3: Balance Sheet – Question 9
Answer the following questions relative to the stockholders’ equity section of the
balance sheet.
By what amount did retained earnings increase or
decrease from the prior year?
Was the increase or decrease in retained earnings
equal to the company’s current year net income or net
loss?
$3 billion
* Enter Yes or No
No, as net income was around
$37 billion, the dividend paid
$10.7 billion, the common
stock repurchased and stock
15
option amount to $23.3 billion
* If No, then dividends were paid (or declared) by your selected company or certain
events took place during the year where the accounting for the events directly affected
the retained earnings account.
Chapter 3: Balance Sheet – Question 10
List (write-in) each financial statement element as shown in your company’s balance
sheet.
Assets
Current Assets
Liabilities
Current Liabilities
Stockholders’ Equity
Common stock with no par
value
Cash and cash equivalent,
Accounts Payable, accrued
marketable securities,
expesnese and deferred
account receivable,
revenue
inventories, deferred tax
assets, other vendor trade
receivable and other current
assets
Retained Earnings
Fixed Assets
Long Term Liabilities
Accumulated Other
comprehensive income/loss
Longer term marketable
securities, Property, plant
and equipment, goodwill,
other intangible assets
acquired and other fixed
assets
Deferred revenue, long
term debt and other non
current liabilities
Click here to enter text.
Click here to enter text.
Click here to enter text.
Click here to enter text.
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Click here to enter text.
Click here to enter text.
Click here to enter text.
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Click here to enter text.
Chapter 3: Balance Sheet – Question 11
Identify the combined carrying values (dollar amounts) of the following selected
account groups taken from your company’s balance sheet:
Account Groups
16
Current
Year
Prior Year
Increase or
Decrease
(in dollars)
Current Assets
All figures in
billions in
$73.3
All figures in
billion in $
57.7
15.6
133.7
118.4
15.3
11
10.8
0.2
Current Liabilities
43.7
38.5
5.2
Long-term Liabilities
39.8
19.4
20.4
Common Stock
19.8
16.4
3.4
0
0
0
Retained Earnings
104
101
3
Other Equity Components
-0.5
0.5
-1
Net Fixed Assets
Intangible and Other Noncurrent Assets
Additional Paid in Capital*
Chapter 3: Balance Sheet – Question 12
Identify the three major balance sheet accounts, for example accounts receivable,
accounts payable, inventory, etc. that changed the most from the prior year. What events
might explain these changes? Working to explain why these changes occurred
contributes to a greater understanding about a company.
Account
Explanation
Example:
Example:
Account
Receivable
An increase in accounts receivable should coincide with an increase
in sales, i.e., a 10% increase in sales would explain a 10% increase
in accounts receivable. If accounts receivable are increasing and
sales decreasing, the signal is unfavorable.
Short Term
Marktable
Securities
It increased by around 43% in 2013 from around $8 billion to
around $ billion. It shows that company has enough cash surplus to
invest in marketable securities, but for short term period. The
surplus cash is due to healthy net earnings for the company for
2013.
Long Term
Marketable
Securities
It shows an increae of around 15% in 2013 as coampred to previous
year, it would be due to availability of cash surplus for lnog term
period. The company would have made this investment due to
healthy earnings and to save money for future replacement of fixed
assets and expansion.
Long Term Debt
The long term debt was zero till 2012, but in 2013 company
acquired around $17 billion, the company would like to get the
advantage of debt financing due to tax shield available on this type
of financing.
17
Chapter 3: Balance Sheet – Question 13
Prepare a common-sized balance sheet (expressed in percentages) using the following
account groups shown in your selected company’s balance sheet.
Account Group
Current
Year
Prior Year
Increase or
Decrease
(current year
percent minus
prior year percent)
Current Assets
35% 33%
Net Fixed Assets
60%
61%
-1%
5%
6%
-1%
100%
100%
Current Liabilities
21%
27%
-6%
Long-term Liabilities
19%
6%
13%
Common Stock
10%
9%
1%
0%
0%
0
50%
58%
-8%
0%
0%
0
100%
100%
Intangible and Other Noncurrent Assets
Total Assets
Additional Paid in Capital
Retained Earnings
Other Equity Components
Total Liabilities and Stockholders’
Equity
2%
Example provided because of common student error in completing this report. All
accounts groups divided by total assets, in dollars.
Account Group
Current
Year
Prior Year
Increase or
Decrease
Current Assets
40%
35%
5%
Net Fixed Assets
40%
45%
-5%
Intangible and Other Noncurrent Assets
20%
20%
100%
100%
Current Liabilities
60%
50%
10%
Long-term Liabilities
10%
15%
-5%
Common Stock
20%
20%
Additional Paid in Capital
5%
5%
Retained Earnings
5%
10%
Total Assets
18
-5%
Other Equity Components
Total Liabilities and Stockholders’
Equity
100%
100%
Chapter 3: Balance Sheet – Question 14
Identify the three balance sheet groups from question 13 above that changed most
significantly. Within each of these groups, identify the primary balance sheet element
that drove this change. What events might explain these changes?
Group Name:
Explanation:
Current Assets
(Example – sales increased by 22%, thus accounts receivable
increased by approximately 22%)
Long term debt
Incresed by around 13%, due to additional borrowing from
long term sources to avaial the tax hield on debt financing.
Retained Earnings
It decreased by around 8%, as the company has paid dividend
in year 2013, which was quite significant as compared to
previous year and also repurchased own stock in 2013.
Current Liabilities
It decreased by around 6%, as company has used long term
debt financing in 2013, which was not done in previous year.
Chapter 3: Balance Sheet – Question 15
Did your company become more or less liquid when comparing this year to last year?
Current Year:
Prior Year:
Current Assets minus Current Liabilities = Current Assets minus Current Liabilities =
$29.6 billion
$19.2 billion
Explain why?
The company has become more liquid as it has higher amount of working capital in
2013 as compared to 2012.
Chapter 3: Balance Sheet – Question 16
Did your company increase or decrease its financial leverage when comparing total debt
to total stockholders’ equity from this year to last?
Current Year:
Prior Year:
Total debt  Total stockholders’ equity =
Total debt  Total stockholders’ equity =
19
68%
49%
Explain why:
The company financial leverage has increased as the debt equity ratios has increased by
around 19% in 2013 as compared to previous year.
20
The Income Statement or Statement of Earnings
Chapter 3: Income Statement – Question 1
Review the heading of your company’s income statement. Does the
company’s income statement provide two or three years of comparative
information? (Insert number to the right.)
Click here
to enter
text.yrs.
Why do you think the SEC requires that balance sheets provide two years of
comparative financial information and income statements provide three years of
comparative financial information?
The financial information for two years to be provided so the comparison of two years
data may be known, while the income statement is for three years to determine the trend
of the revenues and sales so the future expectation may be calculated and appropriate
decision by the investors may be taken.
Chapter 3: Income Statement – Question 2
Review the middle section of your company’s income statement. Did operating income
(loss) increase or decrease from the prior year and by how much? You may have to
compute operating income (loss).
Increased by $Click here to enter text.
Decreased by $6.2 billion and by 11%
Chapter 3: Income Statement – Question 3
Does the middle section of your company’s income statement show a nonoperating
income (loss) increase or decrease from the prior year and by how much? You may have
to compute nonoperating income (loss).
Increased by $ 0.7 billion and by around
180%
Decreased by $ Click here to enter text.
Chapter 3: Income Statement – Question 4
In reference to why you are studying this company, is it important to know the different
sources of income—operating or nonoperating?
Yes it is very important as the operating income is the primary source of revenue
21
and it of recurring nature, while the non operating income is non recurring.
Chapter 3: Income Statement – Question 5
If any of the irregular events are shown on your company’s income statement, describe
the nature and the amount. Select the most current year affected by the event if multiple
years are affected.
Irregular Event
Amount
Nature of the Change
Restructuring charge?
0 Click here to enter text.
Discontinued operation?
0 Click here to enter text.
Extraordinary event?
0 Click here to enter text.
Chapter 3: Income Statement – Question 6
Review the lower section of your selected company’s income statement. Did net income
(loss) increase or decrease from the prior year and by how much?
Increased by $ Click here to enter text.
Decreased by $ 4.7 billion around 11%
Chapter 3: Income Statement – Question 7
Prepare a common-sized income statement for the categories below.
Account/Category
Current
Year
Prior Year
Increase or
Decrease
(current year
percent minus
prior year percent)
Net Sales (revenues)
100%
100%
Cost of Goods/Services (if applicable)
62%
56%
6%
Gross Profit
38%
44%
-6%
9%
9%
0
29%
35%
-6%
Nonoperating Income (Loss)
1%
1%
0
Income Tax Expense
8%
9%
-1%
22%
27%
-5%
Operating Expenses
Operating Income (Loss)
Net Income
Example provided because of common student error in completing this report. All
22
account categories divided by net sales (revenue), in dollar.
Account/Category
Current
Year
Prior Year
Net Sales (revenues)
100%
100%
Cost of Goods/Services (if applicable)
(35%)
(36%)
Increase or
Decrease
(1%)
cost of goods
sold decrease
Gross Profit
65%
64%
1%
gross profit
increase
Operating Expenses
(25%)
(23%)
2%
expenses
increased
Operating Income (Loss)
40%
41%
(1%)
operating
income
decreased
Nonoperating Income (Loss)
Income Tax Expense
5%
5%
(20 %)
(17%)
3%
taxes
increased
Net Income
25%
29%
(4%)
Chapter 3: Income Statement – Question 8
Identify the three income statement accounts/categories that changed the most in
Question 7. What events might explain these changes?
Account or
Category:
Explanation:
(Hint – the MD&A section will provide good information to answer
this question.)
Cost of goods
sold
The cost of goods sold has increased by 6%, it might be due to
buying of new fixed assets which would have resulted in higher
amount of depreication in 2013.
Income Tax
It has decreased by around 1% due to lower earnings before taxes in
23
expesnse
2013, as compared to 2012.
Revenues
It has increased by around 9% due to better marketing efforts and
better quality of products.
Chapter 3: Income Statement – Question 9
Identify your company’s Basic and Diluted EPS amounts. Place a N/A in Diluted EPS if
not reported.
Basic EPS
Diluted EPS
Current year
$40.03
$39.75
Preceding year 1
$44.64
$44.15
Preceding year 2
$28.05
$27.68
Why is diluted EPS always equal to or less than basic EPS?
Normally the diluted EPS is lower than basic EPS as the adjustment is to be made for
any future oprtions available which might increase the number of shares outstanding.
Statement of Cash Flows (SCF)
Chapter 3: SCF – Question 1
Is the SCF dated in the title for a period of time similar to the income statement or for a
point in time similar to the balance sheet? Why?
It is line with income statement and it is also given for three years. It will help in
knowing the difference in amount of net income and the cash flow generated from
operating activities due to timing difference and non cash item.
Chapter 3: SCF – Question 2
Identify the following sections of the SCF and record the amounts. Check the math by
summing to the cash balance at end of year. Verify that the ending cash balance
reported on the SCF is the same as reported on the balance sheet.
Section
Current
Year
Prior Year
Net operating cash flows
53.7 billions
50.9 billions
37.5 billion
Net investing cash flows
-33.8
-48.2
-40.4
Net financing cash flows
-16.4
-1.7
1.4
3.5
1
-1.5
Net increase (decrease) in cash flows
24
Second
Prior Year
Cash balance at beginning of year
10.8
9.8
11.3
Cash balance at end of year
14.3
10.8
9.8
Does the total match balance sheet cash? Enter Yes or
No Yes
Enter Yes or
No Yes
Chapter 3: SCF – Question 3
Record net sales, net income and net operating cash flows below. All three should be
trending in approximately the same direction. If so, this is a sign of a well-run business.
If one or more are going in a different direction, or random, then you must keep an eye
open for an explanation why.
Item
Net Sales
Current Year
Prior Year
Second Prior Year
170.9 billion
156.5 billion
108.2 billion
37.04
41.7
25.9
53.7
50.9
37.5
Net Income
Net Operating
Cash Flows
Explain why net sales, net income and net operating cash flows are trending together or
differently. (Hint: Look at depreciation expense and substantial changes in inventory,
accounts receivable and accounts payable balances. Explaining why is a key learning
point.)
The net sales is showing increasing trend in all three years, but the net income is
showing declining trend in 2013 because of higher cost of goods sold as compnared to
2012. The operating cash flow is showing increasing tend in all three years due to
higher amount of sales in all three years.
Chapter 3: SCF – Question 4
Identify the primary cash outflows and inflows from investing activities.
Description of Activity
Amount
Cash outflow: Purchase of marketable securities
$148.5 billion
Cash inflow:Proceeds from sale of marketable securities
$104.1 billion
Consider three key issues at this point. Is the company adding assets? This is a sign of
growth. Is the company replacing assets? This is a sign of growth and stability. Is the
company only selling assets? This is a sign of retrenchment.
25
The company is growing as the new fixed assets have been purchased and the
investment hs been made in non operating fixed assets.
Chapter 3: SCF – Question 5
Identify the primary cash inflow and outflow from financing activities.
Description of Activity
Cash inflow:
Cash outflow: (Note: cash dividends paid are reported here.)
Amount
$17 billion
$10.6 billion
Consider two key issues at this point. How is the company being financed, through debt
or equity? Can you determine which is growing faster and why? A sound corporate
strategy is to finance a company with debt during stable times, because this demands
regular payment of principal and interest, and to finance a company with equity during
unstable times, because leadership can elect to pay or not pay dividends.
The company has financed through long term debt in 2013, which shows that company
is stable and confident to meet the obligation of lenders of money.
The Statement of Stockholders’ Equity (SSE)
Chapter 3: SSE – Question 1
Identify the elements that comprise the statement of stockholders’ equity section of your
company. Hint: These items are generally illustrated across the top of the page using a
columnar format. (Example. Common stock – shares and dollar amount.)
Common stock, retained earnings and accumulated other comprehensive income/loss.
26
Chapter 3: SSE – Question 2
Identify the cash dividends per share.
11.4
Determine the dividend payout percentage. A company’s
dividend payout percentage is computed by dividing dividend per
common share by net income or earnings per common share.
(Hint: If your company reported a net loss for the year, the answer
lacks meaning.)
29%
Compute dividend yield. A company’s dividend yield is
computed by dividing dividend per common share by market
price per common share. (Hint: Use the current per share price for
your selected company.)
2.05%
Is your company’s dividend yield a reasonable return given current market conditions?
The company has paid good amount of dividend in 2013 and it is almost at par of
industrial average dividend yield of 2%.
Notes to the Financial Statements
Chapter 3: Notes to the Financial Statements – Question 1
How does your company define “cash and cash equivalents”?
Cash and all instrument which may be converted in to cash in 90 days, such as money
market fund, certificate of deposit, commercial paper and US Tresury Securities.
Chapter 3: Notes to the Financial Statements – Question 2
How does your company value its “inventories”? Explain the meaning of the inventory
valuation method. Are domestic and international inventories valued thesame?Service
companies will typically not have inventory.
FIFO cost flow method is used to value inventory, the the lower of cost or market value
concept is applied to present in the balance sheet.
Chapter 3: Notes to the Financial Statements – Question 3
Does your company report any investments in marketable securities? Identify the
respective amount(s) invested.
Category
Trading Securities
Available-for-Sale Securities
Current Year Amount
$26.3 billion
Click here to enter text.
27
Held-to-Maturity Debt Securities
$106.2 billion
Chapter 3: Notes to the Financial Statements – Question 4
Note 1 and a separate note on income taxes should provide the information to answer
this question.
What was your company’s income tax
expense for the current year?
$13.1 billion
How much cash was paid for income taxes
in the current year? (Hint: Review the
SCF. The difference generally relates to
the accrual basis of accounting.)
$9.1 billion
Identify the three major elements, such as depreciation or other post employment
benefits, that gave rise to deferred tax assets or deferred tax liabilities:
Deferred Tax Assets
Deferred Tax Liabilities
Accrued Liabilities and other reserves
Unrealized earnings on foreing investment
Deferred Revenue
Other
Share based compendation
Click here to enter text.
What is this year’s effective tax rate for
your company? What is the current year
statutory rate?
Effective Tax Rate: %26.2%
Statutory Tax Rate: %35%
Chapter 3: Notes to the Financial Statements – Question 5
Reviewing note #1, any related supporting notes, and/or the 10-K, identify the fixed
asset group(s), depreciation methods used, and the estimated useful lives of these fixed
assets.
Fixed Asset Group
Depreciation Method
Estimated Lives (range)
Building
Straight line
Remainng life- 30 years
Machinery and Equipemnt
Straight line
2- 5 years
Leasedhold improvement
Straight line
Leased term -10 years
whichever is minimum
Click here to enter text.
Click here to enter text.
Click here to enter text.
Click here to enter text.
Click here to enter text.
Click here to enter text.
28
Chapter 3: Notes to the Financial Statements – Question 6
Review the balance sheet, note #1, and any related notes and identify the amount of
goodwill reported in the current year.
Amount reported in current year.
$ 1.6 billion
Identify the amount of any significant write-down of
goodwill that occurred during the current year.
$0
How does management describe how it accounts for goodwill as disclosed in the note(s)
to the financial statements?
The company record goodwill at the time of acquisition of any business. And it is shown
at its gorss crrying value, no amortization is recorded on goowill.
Chapter 3: Notes to the Financial Statements – Question 7
Given present executive compensation packages, why would the user of financial
information prefer a company follow SFAS #123(R) instead of APBO #25? Explain.
Accroding to SFAS 123 R, the stock option is entitled to be shown as expense at its fair
value.
Chapter 3: Notes to the Financial Statements – Question 8
Review your company’s lease note (and related balance sheet information), then identify
the following amounts:
Minimum lease payments under operating leases
$4.7 billion
Minimum lease payments under capital leases
Ratio of operating lease payments to capital lease
payments
0
May not be calculated
As a user of reported financial information, would you be concerned about a significant
amount of operating leases that are not reported in the balance sheet? Explain.
The amount of minimum lease payment of $4.7 billion which has not been shown as
liability, if it has to be paid it will decrease the future earnings of the company.
Chapter 3: Notes to the Financial Statements – Question 9
Review your company’s long-term debt note and identify the following (consider the
three most significant liabilities only):
29
Instrument
Maturity Date
Rate
Amount Due
Fixed Rate Note
2023
2.4%
$5.5 billion
Fixed Rate Note
2018
1%
$4 billion
Fixed Rate Note
2043
3.85%
$3 billion
How much interest expense was
recognized in the current year?
$136 million
How much cash was paid for interest in
the current year? (Hint: Look in the
SCF.*)
0
*The difference between interest expense and cash paid for interest is due to the accrual
basis of accounting (and in some cases, the capitalization of interest).
Chapter 3: Notes to the Financial Statements – Question 10
Review your company’s pension and OPEB note (if applicable) and answer the
following questions.
Pensions
OPEB
How much is the Projected Benefit
Obligation (PBO) and Accumulated
Postretirement Benefit Obligation
(APBO) for your company at the
end of the current year?
NA
0
What was the amount of pension or
OPEB benefits paid to plan
participants during the current
year?
NA
0
What amount of cash did the
company contribute to the
respective funds during the current
year? This is known as “employer
contributions.”
NA
0
What is the value of the plan assets
at the end of the current year?
NA
0
Based on your review of the plan assets and the projected benefit obligation (or
accumulated postretirement benefit obligation), has your company sufficiently funded
its employee benefit plans (this is known as funded status)?
NA
30
An expected average return on invested plan assets is used to reduce the volatility in the
reporting of pension or OPEB expense. Higher expected average returns reduce pension
or OPEB expense, and lower expected returns increase pension expense. What rate of
return on plan assets does your company use to compute pension or OPEB expense?
Does this appear reasonable, given present market conditions?
Rate employed?NA
Response:NA
Chapter 3: Notes to the Financial Statements – Question 11
Based on your review of the contingencies note, briefly identify specific events that have
led to the accrual of contingent liabilities in your selected company’s the balance sheet.
Various legal proceedings and claims to the company during the ordinary course of
business. The case against Samsung is pending and it is in the final stage of judgement
an dit is expected that company will be awarded $1.05 billion, but company ha not made
any provision in this regard. A case against company by Vinert X Inc. regarding the
product patents. The company will be able to defend the case therefore no losses have
been recorded or liability have been shown.
Chapter 3: Notes to the Financial Statements – Question 12
Based on your review of the segment-reporting note to the financials, identify the
reported operating segments, their related revenues, and operating income. Identify the
largest three if more than three are disclosed.
Reportable Operating Segments
America
Net Sales Revenue
Net Operating Income
$62.7 billion
$22.8 billion
Europe
37.9
13
Greter China
25.4
8.5
Chapter 3: Notes to the Financial Statements – Question 13
Based on your review of the segment-reporting note to the financials, identify the
geographical segments and their related revenues. Identify the largest three if more than
three are disclosed.
Country
US
China
Other countries
Net Sales Revenue
$66.2 billion
26
78.8
31
Chapter 3: Notes to the Financial Statements—Question 14
Based on your review of the notes to the financials or the statement of stockholders’
equity, identify the components (no more than four) that comprise Other Comprehensive
Income for your company.
Component
Change in foreign currency translation
Change in fair value of derivatives
Amount
-$112 million
$522 million
Change in fair value of marketable securities
-$791 million
Adjustment for losses / gain realized and included in net income
-$131 million
32
CHAPTER 4 - FINANCIAL ANALYSIS
Summary Financial Analysis Report
Note: S&P 500 data is no longer available from the website: investing.money.msn.com. You will see this
column in the workbook but not in the Word template form. You are not responsible for S&P 500 data input.
Profit Margin %
Answers how well the
business performed.
Gross
Margin
Pre-Tax
Margin
Net Profit
Margin
Sales
Operating
Income
Operating
Cash
Flows
Gross Profit /
Total Revenue
Operating Income
/ Total Revenue
Net Income /
Total Revenue
Company Two
Years Prior
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Company One
Year Prior
Company
Industry
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Financial
Statement
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Not required
Financial
Statement
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Not required
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Not required
Financial
Statement
Evaluate Profitability (Think about the corporate strategy in providing a response. Following
are general guidelines, yet each company situation is unique. For a company with a growth
strategic focus you will likely find increasing performance, above or below industry average. For
a company with a stability strategic focus you will likely find stable performance, above or
below industry average. For a company in a retrenchment strategic focus you will likely find
poor performance, below industry average with efforts to improve and approach industry
average. Note: Sales, operating income and operating cash flows should trend in approximately
the same direction. This signals a stable operating business environment. If the three measures
are not trending together, this signals lack of control by management.)
Click here to enter text.
33
Financial Condition
Signals ability to take on
additional debt and
liquidity.
Debt/
Equity
Ratio
Current
Ratio
Quick
Ratio
Interest
Coverage
(Total Liabilities –
Current Liabilities)
/ Total equity
Current assets /
Current liabilities
(Cash and Short
Term Investments
+
Short Term
Investments +
Total Receivables,
Net) /
Current Liabilities
Data not readily
available
Company Two
Years Prior
Company One
Year Prior
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enter text.*
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Company
Industry
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Evaluate Financial Condition (often labeled liquidity and solvency analysis) (Think about the
corporate strategy in providing a response. Following are general guidelines, yet each company
situation is unique. For a company with a growth strategic focus you will likely find stable or
slightly decreasing liquidity, above or below industry average. Debt to equity often is increasing
in a growing company. For a company with a stability strategic focus you will likely find stable
liquidity, above or below industry average. Debt to equity often is stable as well. For a company
with a retrenchment strategic focus you will likely find poor liquidity, below industry average
with efforts to improve and approach industry liquidity. Debt to equity often is decreasing in a
company during retrenchment.)
Click here to enter text.
34
Investment Return %
Signals performance for
managers and owners.
Company Two
Years Prior
Company One
Year Prior
Return On
Equity
Net Income /
Total Equity
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enter text.*
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enter text.
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enter text.
Net Income /
Total Assets
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Return On
Equity
(5-Year
Avg.)
Not required
Not required
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Return On
Assets
(5-Year
Avg.)
Not required
Not required
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Return On
Assets
Company
Industry
Evaluate Investment Return (Think about the corporate strategy in providing a response.
Following are general guidelines, yet each company situation is unique. For a company with a
growth strategic focus you will likely find increasing returns. For a company with a stability
strategic focus you will likely find stable investment returns. For a company in a retrenchment
strategic focus you will likely find poor and stable investment solvency, below industry average.)
Click here to enter text.
35
Management Efficiency
Signals how well the
company was run by
management.
Company Two
Years Prior
Company One
Year Prior
Company
Industry
Income/
Employee
Not required
Not required
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Revenue/
Employee
Not required
Not required
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Receivable
Turnover
Total Revenue /
Average
Accounts
Receivable Trade, Net
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enter text.
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enter text.
Average is defined: (beginning of the year + end of the year) / 2
Inventory
Turnover
Asset
Turnover
Cost of
Revenue, Total /
Average Total
Inventory
Total Revenue /
Average Total
Assets
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Evaluate Management Efficiency (Think about the corporate strategy in providing a response.
Following are general guidelines, yet each company situation is unique. For a company with a
growth strategic focus you will likely find improving efficiency, above or below industry
average. For a company with a stability strategic focus you will likely find stable efficiency,
above or below industry average. For a company in a retrenchment strategic focus you will likely
find poor efficiency, below industry average with efforts to improve and approach industry
average.)
Click here to enter text.
36
CHAPTER 5 - DECISION-MAKING PROCESS
Chapter 5: Decision-making Process – Question 1
Based upon your review, do the numbers support the company’s explicit strategic focus: a
growth, stability or retrenchment focus? Why or why not?
Click here to enter text.
Chapter 5: Decision-making Process – Question 2
Return to the first question in this project.
Chapter 1: Identify Why You Selected This Company—Question 1
A) What is/are your motivation(s) or interest(s) in selecting this company?
B) What question(s) are you seeking to answer?
You were asked to explain why you were investigating this company’s annual report. You have
likely uncovered numerous pieces of information, some with conflicting insight. This may
involve both financial and nonfinancial information. In addition, you may have found certain
information to be incomplete for decision-making purposes. This is real world analysis. Most
business decisions are made with as much reliable information as possible, yet common to the
decision-maker is a desire for more information.
Prepare a thorough, yet concise answer to your original questions A and B above. For example,
would you work for this company, why or why not? Support your response with the information
gathered throughout your annual report study.
Click here to enter text.
37
Chapter 5: Validate Your Conclusion – Question 1
The Altman Z-score is a predictive model created by Edward Altman in the 1960’s. The score
combines and weights five financial ratios to estimate the likelihood of a company going
bankrupt. The lower the Altman Z-score the higher the odds of bankruptcy. Research findings
suggest the Z-score predicts 72 - 80% of corporate bankruptcies two years prior to the actual
filing.

Z-score > than 3 = considered healthy

Z-score between 1.8 and 3 = considered a warning sign

Z-score < than 1.8 = could be headed for bankruptcy
Computing the Z-score for your company is very simple. Go to one of the Websites listed
below and compute the Z-scores for the respective years identified below. Print out your results
and turn them in with this workbook.

www.jaxworks.com/calc2a.htm

www.ironwoodadvisory.com/zscore.htm
Two Years Prior
Z-score
Click here to enter
text.
One Year Prior
Click here to enter text.
Current Year
Click here to enter text.
Z-score interpretation compared to the financial analysis. Does the Z-score agree or disagree
with your analysis?
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Congratulations.
Now submit to your instructor your completed workbook per the instructions
provided at the beginning of this document.
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