Financial Statement Analysis Summary
The financial statement Is a document reporting the outcome of the business. Managers, Investors, and the public can look to the financial statements to assess a current position, past performance, and predictions of future performance (Horned, Sunder, Stratton, Burgomaster, & Chatterer, 2008). The Individual financial statement assists Investors in coming to a conclusion concerning the company. It is imperative that investors not only evaluate the financial statements on an individual basis but also compare them to other companies within the same industry.
The financial statement in itself may not provide an investor with sufficient information concerning the inner workings. Thus, investors use data calculations and ratios to establish how companies measure up to one another. For instance, one reported net income may not be equivalent to a business in the same industry if the two differ In size. Conversely, a profit margin ratio calculated by dividing sales Into net Income Is equivalent to any other company regardless of size.
This paper illustrates the annual report data for three firms In the manufacturing, service, and retail sectors and portrays the financial standing. How Differences In Industries Affect Presentations The discrepancy in industries affects presentations because industries operate differently, especially when coming from different sectors. Comparing presentations from one company to the next is like comparing apples to oranges. It is important to observe each industry separately and evaluate them on an individual basis.
Since each company has its own operating parameters, a high debt ratio for one company could mean opportunity and growth. However, a high debt ratio for an alternative company could be an indication of weakness. McDonald’s Is a large company. Cataracts Is a smaller yet also a successful company. 80th companies have ratios below the Industry ratio (The American Association of Individual Investors, 2011). Cataracts has a much lower ratio than as well as the Industry on average (The American Association of Individual Investors, 201 1).
It should be no secret that uses a lot of long-term debt (The American Association of Individual Investors, 2011 Both Cataracts and have fairly strong balance sheets when compared to their industry. Cataracts appears to have a stronger balance sheet that McDonald’s, but is large and well-established company (The American Association of Individual Investors, 2011). It has been able to hold more debt without adding a great deal of danger. Toyota however may not be able to handle a high debt ratio. Right now Toyota is not a bargain (Seeking Alpha, 2011).
It is not able to handle a high debt ratio like McDonald’s and Cataracts. In comparing financial statements, it is imperative to assess related Industries In order to achieve significant and accurate Insight Into that business. SAAB and FAST The three companies discussed In this paper symbolize different sectors of business. The businesses examined are neither related nor reliant on one another. The FAST. The SAAB establishes international principles in the preparation of financial statements. The FAST sets the benchmark for the United States and makes sure information is available to the public.
The framework for FAST is sketched out through the Generally Accepted Accounting Principles (GAP). Although there are many similarities between the SAAB and the FAST, there are a few notable different measurement conventions that will affect how financial statements are presented. There are three main measurement conventions that are seed to dictate how information is accounted for on financial statements, recognition, matching and cost recovery, and stable monetary unit. Recognition can be defined as when to record revenue on a financial statement (Horned, Sunder, Burgomaster, Chatterer, & Stratton,?,? 2008).
Matching and cost recovery can be defined as when to record expenses and a stable monetary unit is described as what monetary unit will be used on the financial statements (Horned, Sunder, Burgomaster, Chatterer, & Stratton,?,? 2008). For recognition the SAAB has a criterion that it must be probable hat any future economic benefit associated with the item will flow to or from the entity?,? (International Financial Reporting Standard,?,? 2011). The FAST does not include probability as a recognition criterion (Financial Accounting Standards Board. ?,? n. D. ). Another significant difference is having a stable monetary unit or measurement. The FAST separates measurement into selection of the monetary unit, and choice of attribute and adopts nominal units of money over the alternative, which is units of constant general purchasing power that are more appropriate if inflation is high (Financial Accounting Standards Board. ?,? n. D. ). The SAAB discusses various alternatives of monetary units but choose one?,? (International Financial Reporting Standard,?,? 2011).
The differences in the requirements to recognize revenues could mislead investors because the SAAB allows for probability and the FAST does not. FAST statements would not reflect future revenue that may be recognized. The varying concepts of measurement would affect the presentations because the FAST would define what monetary unit would be best when dealing with economies that are experiencing high inflation, however the SAAB loud only discuss the various alternatives. McDonald’s, Cataracts and Toyota all have ties to both the SAAB and the FAST.
McDonald’s has been a leader in adopting accounting policies such as FAST No. 123. This FAST policy states that in addition to the current expensing of stock options, they have also ceased using straight line depreciation for their rent expense and changed to an amortize improvements of the leased property. This will result in tax benefits of $179 million (McDonald’s, 2005). . Cataracts also has experience with the FAST. The beginning of Cataracts first fiscal ratter of 2006, the Company adopted the fair value recognition provisions of FAST statement NO. REAR “Share-Based payment” (“SEAS REAR”).
SEAS REAR requires all stock-based compensation, including grants of employee stock options, to be recognized in the statement of earnings based on their fair values (Cataracts, 2006). In June 2006, the Financial Accounting Standards Board issued FAST Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FAST Statement No. 109 FIN 48 clarifies the accounting for uncertainty in tax positions and requires a company to recognize in its to to be sustained on audit, based on the technical merits of the position. Toyota adopted FIN 48 from the fiscal year begun after December 15, 2006 (Toyota Motor, 2010).
The SAAB is important as well. The example of the SAAB comes from McDonald’s but can be true for all three companies. The SAAB is also involved with McDonald’s. The requirements were broader and less of a big deal than the US requirements. If you are for instance, the sale of every restaurant becomes a discontinued operation (SAAB, 2009). As is stated SAAB requirements are less strict than those of the FAST requirements. Conclusion In conclusion, a company hat has the ability to analyze their financial statement has the key to unlocking the success.
From the financial statement the company can focus attention on their current, past, and future performance. The three companies that were covered each operate differently compared to one another. McDonald’s, being a large company, can handle a high debt ratio. This would be through long term debts. Though, Cataracts is a smaller company they have a much stronger balance sheet than McDonald’s. They are also able to handle the high debt ratio. Toyota on the other hand may not be able to handle the high debt ration like he other two companies.