ACC390_Financial Statement Analysis & Valuation
Case Study of Financial Statement Analysis
INTRODUCTION
This case study is assigned to enhance students’ practical skills in financial statement analysis and valuation. This case contributes 10% to the overall module grade. At the end of the semester, you need to put your analysis together, write a report (as discussed in detail below) and submit it under the “Project” section on Moodle for final assessment and presentation.
Group work, in term of being sure that all students get involved in solving their case (in case you are working as a group), a self-assessment will be held after submitting the final report of this case about the involvement percentage of each student in preparing the analysis.
Submission, the case final report must be submitted no later than 12:00 am on Sunday, 10/12/2022. Please note:
- All work submitted after the submission deadline without an approved valid reason will be given a mark of zero. (This is not the same as a non-submission, as a late submission counts as an attempt and a mark of zero).
- It is compulsory to answer all questions.
CASE SETTING
The project outlined below is set in the case context of a student who has been offered a top management employment with a selected firm, and his salary depends on the profitability of the firm. The student wishes to determine if the firm is in sound financial condition before deciding whether to accept the job.
Thus, the project requires students to use financial statements of the firm, plus a Microsoft Excel template provided separately, to: (1) construct common-size financial statements, (2) prepare cash flow statements, (3) calculate financial ratios, and 4) answer a series of analytical questions addressing the firm’s financial performance in the areas of liquidity, solvency, asset management, profitability, and cash flow, as well as the market’s assessment of the firm’s financial condition.
In addition, students may be asked to obtain industry average ratios. The series of analytical questions is designed to enable you to link together the information provided by the several analytical tools and so obtain a complete picture of the firm’s financial performance over the past several years and relative to the average firm in the industry.
ANALYSIS
Companies’ annual reports for the years 2020, 2021, & 2022 are available online. You will need balance sheets, cash flows and income statements, and you need to obtain industry average data using three mentioned firms’ financial reports.
Your task now is to assess the financial condition of chosen firm through both: (1) a 2020-22 trend (historical) analysis, and (2) a 2022 peer group (industry) analysis using 2022 data for the mentioned firms. Remember: In doing your analysis you are essentially telling a story about the selected firm financial performance over the last few years and relative to other similar-sized firms in the industry.
Required: This case involves a Microsoft Excel template with four major components. First, you must enter data from the financial statements of selected firm into the Excel spreadsheet (every cell containing an “A”), either by entering the data directly or by entering an appropriate cell-referenced equation, for the three years 2020-22.[1]
Second, you must enter cell-referenced equations into the template to construct (1) common-size balance sheets and income statements for each of the three years (every cell containing a “B”), (2) financial ratios for each of the three years (every cell containing a “C”), and (3) accounting cash flow statements for 2021 and 2022 (every cell containing a “D”). For simplicity, all financial ratios requiring balance sheet data should be calculated using year-end figures rather than an average of beginning-of-year and end-of-year data.
Next, you must enter 2020/21 industry data (common-size financial statement data and financial ratios) for “Total Telecommunication services” from the 2020-2022 Average industry calculation that you have done (every cell containing an “E”). Finally, you must assign qualitative assessments of Good, OK/Good, OK, OK/Poor, or Poor to the trends in each of the firm’s financial ratios as well as to the degree to which the firm’s financial ratios are superior to the matching industry ratios (every cell containing an “F”).
Third, in addition to the Excel requirements outlined above, you must answer the following set of analytical questions on the several areas of financial performance— liquidity, asset management, financing of assets, profitability, and cash flow—and then pull all your analysis together to give an overall evaluation of the firm. In answering these questions, do not forget to look at the firm’s common-size balance sheet and income statement items, including trends over 2020-22 and the relationship of 2022 common-size ratios to industry data.
Finally, you might consider the market’s assessment of the firm, any additional analysis you can conduct from the learnt analysis in this course and, based on both yours and the market’s assessment, PREPARE a final report includes the firm’s background, your analysis, and your final decision whether you would accept employment with the firm.
Report Style & Format
- Style: Report
- Font size: 12 pt (preferably Arial)
- Line Spacing: 1.5 lines
Plagiarism Warning!
Case study should not be copied in part or whole from any other source, except for any marked-up quotations that clearly distinguish what has been quoted from your work. Students found copying from the internet or other sources will get zero marks.
Major Questions:
Liquidity
- Look at the current ratio and the quick (acid-test) ratio of the firm. What trends do you notice over 2018-20, and what does this suggest about firm’s liquidity? How does firm’s liquidity in 2020 compare with the industry average?
- Now study the accounts receivables turnover and inventory turnover of the firm. What do these patterns suggest about the firm’s conversion of accounts receivable and inventories to cash?
- Considering your answers to the two questions above, what is your overall assessment of the firm’s liquidity position? What two major factors account for your assessment?
Asset Management
- What is your assessment of the way the firm is managing its assets? Pay attention to both trends and industry averages.
Financing of Assets
- What is your assessment of the way the firm is financing its assets? Pay attention to both trends and industry averages. What is the relationship between the total debt ratio and times interest earned as these relate to the firm? And is there any other possible explanation (outside of the firm’s financial statements) for the observed trend in times interest earned?
Profitability
6. What can you say about the firm’s operating profit margin and pre-tax net profit margin? Explain any patterns observed.
7. How are the firm’s pre-tax net profit margin, total asset turnover, and total debt ratio affecting the firm’s pre-tax return on assets (ROA) and return on equity (ROE)? What is your overall assessment of the firm’s profitability, including its earnings per share (EPS)?
Cash Flow
Bankruptcy and manipulation
9. using Altman and Beneish models, do you think the companies might face bankruptcy or they are manipulating their financial information.
Overall Evaluation
- Based on your answers to the questions above, what is your overall evaluation of the firm’s financial condition? (Pull all your analysis together in answering this question.)
- What is the market’s assessment of the firm’s financial condition? Explain. Does the market’s assessment confirm or refute your analysis?
- Based on your evaluation of the firm and the market’s assessment of the firm, would you accept employment with the company? Explain.
Thank you,,
[1] Using summation/subtraction equations, along with reconciling equations for depreciation expense/accumulated depreciation and additions to retained earnings/accumulated retained earnings, will ensure that the financial statements are arithmetically correct and appropriately reconciled.
