Financial Accounting Midterm Project - Essay Example

?Financial Accounting Midterm Project Managerial accounting is useful in providing managers with relevant and timely information needed to make decisions regarding the business operations. In contrast, financial accounting is useful in providing both managers and external users with the operating results of the business operation as well as its financial condition. The external users of financial accounting reports include the stockholders or owners of the enterprise, the creditors, government agencies, the suppliers and the general public. (Warren, Reeve, etc., 1987, pp. 2-4) The reports of financial accounting come in the form of financial statements - income statement, balance sheet, statement of retained earnings and statement of cash flows - that are prepared at fixed intervals (monthly, quarterly or annually). Meanwhile, managerial accounting reports are designed to serve specific needs of the management. They make use of both historical data and estimated data. While financial accounting reports have to be prepared according to the Generally Accepted Accounting Principles (GAAP), the same does not hold true with managerial accounting reports. (Warren, Reeve, etc., 1987, pp. 2-4) A job opening in the field of financial accounting at the Monster website states that "the Accounting Manager is responsible and accountable for the entire Company's Accounting Department." As such, he/she will manage and provide direction to the accounting department personnel as well as direct and lead all accounting functions to ensure that all accounting, financial and tax information are properly disseminated and reported. The job requirements include a bachelor's degree in Accounting, experience in cost accounting and the preparation of cash flow statements and skills in preparing tax returns and audit reviews. (Monster 2010) Meanwhile, a job opening in the field of managerial accounting requires a Revenue Accounting Manager who will have the following main duty: "continuously work to understand the various revenue streams to ensure the highest levels of revenue recognition." (Monster 2010) Similarly, the job requirements include a bachelor's degree in Accounting. In contrast to the job opening for a financial accountant, however, this one requires "strong project management and planning skills" and an "analytical mind which is able to process information logically delivering value added analysis." These stuffs are definitely necessary in the domain of managerial accounting. 2. According to history, accounting was first established by Luca Pacioli - an Italian Renaissance mathematician, a close friend and tutor to Leonardo da Vince and a contemporary of Christopher Columbus. Pacioli described in his work entitled "Summa de Arithmetica, Geometria, Proportione et Proportionalite" a system that served to make sure that financial information were efficiently kept in accurate records. This basic system eventually became established as the way to note down all transactions of businesses. (Weygandt, Kieso, etc. 2009, pp. 5-6) 3. The following are the liquidity ratios of Microsoft Corporation (MSFT) and Apple Inc. (AAPL) for the year 2010: MSFT AAPL Current Ratio 2.5 1.8 Acid Test Ratio 2.2 1.6 These ratios show that both MSFT and AAPL have sufficient liquid resources to pay up their short-term liabilities. Of the two, MSFT is the company with the higher level of liquidity. The current ratios indicate that their current assets can well be utilized to fully settle their current liabilities. Meanwhile, the acid test ratios indicate that the two companies would be able to fully settle all their short-term liabilities by using only the most liquid of their assets - namely: cash, marketable securities and accounts receivable. 4. The following are the activity measures of Microsoft Corporation (MSFT) and Apple Inc. (AAPL) for the year 2010: Asset Management Ratios MSFT AAPL Inventory Turnover (# of times) 19.2 63.9 Accounts Receivable Turnover 5.5 16.7 Fixed Assets Turnover 8.8 17.0 Total Assets Turnover 0.8 1.1 The above ratios indicate that AAPL, compared to MSFT, has utilized its inventory, accounts receivable, fixed assets and total assets with more efficiency. AAPL's inventory is over three times that of MSFT's, which says that AAPL's inventories were manufactured and sold at a faster rate compared to those of MSFT's. AAPL also turns out to be better in collecting its accounts receivable and ensuring that they are converted back to cash for use in its operations; AAPL's accounts receivable turnover is three times that of MSFT's. AAPL's fixed assets turnover is almost twice that of MSFT's; it means that the use of AAPL's fixed assets are much more maximized to generate revenues for the company, compared to MSFT. While there is a slight difference in the total assets turnover of the two companies, it turns out that AAPL's is still higher. On the whole, an analyst could see based on these ratios that AAPL is the company whose resources are never idle and are mostly optimized to produce the highest possible sales and profits for the company. 5. The following are the profitability ratios of Microsoft Corporation (MSFT) and Apple Inc. (AAPL) for the year 2010: Profitability Ratios MSFT AAPL Gross Profit Rate 80.16% 39.38% EBITDA Margin 44.35% 29.64% Net Profit Rate 30.02% 21.48% Return on Assets 19.33% 19.09% Return on Equity 44.34% 36.80% The above ratios show that while both MSFT and AAPL are profitable companies, MSFT turns out to be the more profitable one. MSFT's gross profit rate is more than twice that of AAPL's. This is because MSFT's direct costs for its products and services are much lower than those incurred by AAPL. As percentages of their sales, MSFT's Earnings Before Income Tax, Depreciation and Amortization (EBITDA) Margin is also higher than AAPL's; the same is true with their net profit rates. Accordingly, it comes as no surprise that the return on assets and return of equity ratios of MSFT's are higher than those of AAPL's. When the net income or profitability level is used as the barometer, MSFT is the company that performs better. 6. Common-Sized Income Statements for MSFT and AAPL   MSFT (For the year ended 6/30/10) AAPL (For the year ended 9/25/10) (In millions) Amount % Amount %           Revenues 62,484.00 100.00% 65,225.00 100.00% Cost of Goods Sold 12,395.00 19.84% 39,541.00 60.62% Gross Profit 50,089.00 80.16% 25,684.00 39.38% Selling, General & Administrative       Expenses 16,685.00 26.70% 5,517.00 8.46% R&D Expenses 8,714.00 13.95% 1,782.00 2.73% Total Operating Expenses 25,399.00 40.65% 7,299.00 11.19%           Operating Income 24,690.00 39.51% 18,385.00 28.19% Add: Other Income/(Expenses)         Interest Expense (151.00) -0.24% -   Interest & Investment Income 843.00 1.35% 311.00 0.48%   692.00 1.11% 311.00 0.48%           Currency Exchange Gains (Loss) (64.00) -0.10% (174.00) -0.27% Other Non-Operating Expenses (79.00) -0.13% 18.00 0.03% Gains (Losses) from Merger &         Restructuring, Sale of Investments,         Legal Settlements & Other         Unusual Items (226.00) -0.36%               Earnings Before Tax 25,013.00 40.03% 18,540.00 28.42%           Income Tax Expense 6,253.00 10.01% 4,527.00 6.94%           Net Income 18,760.00 30.02% 14,013.00 21.48%           The above tabulation shows that while AAPL has higher revenues in terms of nominal value, it is MSFT that ended up with the higher net income. This means that the net cost of sales and other related expenses of MSFT is lower than the equivalent of AAPL's. The given percentages also show where their differences lie in terms of relativity to their respective gross revenue figures. The cost of goods sold figures alone can explain the disparity between the net income figures of the two companies. While the MSFT's cost of goods sold represents only 19.84% of its sales, AAPL's is as much as 60.62% of its sales. This then results to a huge difference in the gross profit rates of the two companies - 80.16% for MSFT and 39.38% for AAPL. However, this difference is lowered since MSFT's operating expenses as a percentage of its sales is a lot bigger than AAPL's - 40.65% for MSFT versus 11.19% for AAPL. MSFT's. Thus, the net profit ratios of the two companies do not vary as significantly as their gross profit ratios do. At the bottom of the income statement, it shows that MSFT's net profit is 30.02% of its sales while AAPL's is 21.48%. 7. Common-Sized Balance Sheets for MSFT and AAPL The tabulation of the assets of MSFT and AAPL below shows that MSFT has the bigger total worth of assets. The percentages computed also show that MSFT's current assets in relation to its total assets at 64.65% is higher than that of AAPL's (55.44%). MSFT also has the more sizeable goodwill. It can also be noted that the fixed assets of MSFT are already depreciated by over 50% while those of AAPL's are depreciated only by 34%. In terms of inventory as a percentage of its total assets, AAPL holds more as of the end of its fiscal year as compared to MSFT; AAPL's inventory stands to be 1.40% of its total assets while MSFT's is only 0.86%. In terms of liquid assets, MSFT keeps less cash - at 6.39% of its total assets versus AAPL's 14.98% - and it may be traced to the difference in their short-term investments as percentages of their total assets. MSFT's short-term investments stands to be as much as 36.06% of its total assets while AAPL has opted to place only 19.10% of its total assets in short-term investments.   MSFT (As of 6/30/10) AAPL (As of 9/25/10) (In millions) Amount % Amount %           Cash & Cash Equivalents 5,505.00 6.39% 11,261.00 14.98% Short-Term Investments 31,054.00 36.06% 14,359.00 19.10% Total Cash & Short-Term         Investments 36,559.00 42.45% 25,620.00 34.08% Accounts Receivable & Other       Receivables 13,014.00 15.11% 9,924.00 13.20% Inventory 740.00 0.86% 1,051.00 1.40% Deferred Tax Assets, Short-Term 2,184.00 2.54% 1,636.00 2.18% Other Current Assets 3,179.00 3.69% 3,447.00 4.58%           Total Current Assets 55,676.00 64.65% 41,678.00 55.44%           Property, Plant & Equipment 16,259.00 18.88% 7,234.00 9.62% Accumulated Depreciation (8,629.00) -10.02% (2,466.00) -3.28% Net 7,630.00 8.86% 4,768.00 6.34%           Goodwill 12,394.00 14.39% 741.00 0.99% Long-Term Investments 7,754.00 9.00% 25,391.00 33.77% Other Intangibles 1,158.00 1.34% 342.00 0.45% Other Long-Term Assets 1,501.00 1.74% 2,263.00 3.01%           TOTAL ASSETS 86,113.00 100.00% 75,183.00 100.00%           The liabilities and equity sections of the balance sheets of MSFT and AAPL show stark differences. While MSFT has long-term debts that stand to be 5.74% of its total liabilities and equity, AAPL has none. In terms of both the values and the percentages with respect to the total liabilities and equity, MSFT's total liabilities - at 46.48% - is a lot higher than AAPL's, which is computed at 36.43% only. MSFT is, therefore, the more leveraged company between the two.   MSFT (As of 6/30/10) AAPL (As of 9/25/10) (In millions) Amount % Amount %           Accounts Payable & Accrued         Expenses 7,308.00 8.49% 12,847.00 17.09% Short-Term Borrowings 1,000.00 1.16% -   Current Portion of Long-Term Debt 33.00 0.04% -   Current Income Taxes Payable 1,074.00 1.25% 210.00 0.28% Other Current Liabilities 3,080.00 3.58% 4,018.00 5.34% Unearned Revenue, Current 13,652.00 15.85% 3,647.00 4.85%           Total Current Liabilities 26,147.00 30.36% 20,722.00 27.56%           Long-Term Debt 4,939.00 5.74%     Unearned Revenue, Non-Current 1,178.00 1.37% 1,139.00 1.51% Deferred Tax Liability, Non-Current 229.00 0.27% 4,300.00 5.72% Other Non-Current Liabilities 7,445.00 8.65% 1,231.00 1.64%           Total Liabilities 39,938.00 46.38% 27,392.00 36.43%           Common Stock 62,856.00 72.99% 10,668.00 14.19% Retained Earnings (17,736.00) -20.60% 37,169.00 49.44% Comprehensive Income & Others 1,055.00 1.23% (46.00) -0.06%           Total Equity 46,175.00 53.62% 47,791.00 63.57%           TOTAL LIABILITIES & EQUITY 86,113.00 100.00% 75,183.00 100.00%           Another noticeable item the difference between the retained earnings of the two companies. While MSFT has a deficit of US$17.7 billion, AAPL has a huge retained earnings balance of over US$37.00 billion. AAPL seems intent on holding on to its surplus for future projects instead of giving out higher dividends to its shareholders. 8. The First-In, First-Out method ensures that the specific costs that make up the total cost of goods sold for the period are those that have been incurred first, based on the order of their purchase dates. Using this method results to ending inventories that are valued at their most updated or latest prices since the items that were sold were valued at the earlier or previous prices. FIFO, therefore, leads to better valuation of inventories in the balance sheet. (Warren, Reeve, etc., 1987, p. 268) In contrast, the Last-In, Last-Out (LIFO) method ensures that the cost of goods sold for the period represent the most recent purchase prices of the items. Using this method results to cost of goods sold in the income statement that is based on the latest or updated prices. LIFO, therefore, leads to better computation of total cost of goods sold, gross profit and net profit for the period. (p. 270) When the Average Cost method is used, an average unit cost for the individual items is computed each time additional inventory items are purchased (p. 271). The most recent average unit cost, therefore, represents the unit cost for all the items in the entire bulk, regardless of when the specific item was purchased. Specific Identification method of costing requires the tracing of the specific unit costs of all inventory items issued out or released. This method practically requires the inventory custodian to accordingly mark the inventory items with their individual costs or purchase dates for accuracy in assigning costs to each of them. 9. Financial Analysis of Dollar General Corporation a) Return on Average Total Assets = 7.79% This ratio shows that the company is able to generate US$ 7.79-profit for every US$ 100 worth of assets owned by the company. While it is relatively not a high return, it is a good indication that the company has been able to stay profitable despite the financial crisis. b) Net Profit Margin = 3% This ratio shows that the company's net profit is only 3% of its gross sales. It shows that the company incurs US$ 0.97 as direct and indirect costs for every US$ 1.00 that it generates as revenues. While this net profit margin is relatively low, it is another good indication that the company has been able to stay profitable despite the financial crisis. c) Working Capital = US$ 638.9 million This working capital figure shows that the company is liquid; it has sufficient current assets to cover its current liabilities. d) Current Ratio = 1.6 This ratio interprets as a percentage the current assets that the company has in excess of its current liabilities. It means that the company has US$1.6-worth of current assets for every US$1.0 that it owes in the short-term (current). e) Acid-Test Ratio = 0.2 This ratio further tests the company's liquidity level. It shows that if the company's most liquid assets only would be used, it will not be able to pay up all of its current liabilities. The current assets considered for this ratio are only the cash and cash equivalents, the marketable securities and the accounts receivable. These items in the company's balance sheets, therefore, cannot match the total current liabilities that it has. The company has only US$ 0.20-worth of liquid asset for every US$ 1.00 of its current liabilities. 10. The scandal that struck Enron has left permanent scars in the financial world. It showed the enormity of consequences that can be brought about by sheer dishonesty and abuse of power and public trust. The executives of Enron and the auditing firm involved, Arthur Andersen, undertook to hide the true condition of the company and fooled people into believing that all was well. While they succeeded to manipulate the stock prices of Enron as a result of the excessive window-dressing that they pulled off, the practice of such unethical and irregular accounting procedures was in time made known and the Enron stock plummeted. Enron filed for bankruptcy protection in the year 2001. References Warren, C., Reeve, J. & Duchac, J. (2009). Managerial Accounting. Mason, OH: South- Western Cengage Learning Academic Resource Center Monster. (2010). Accounting Manager. Retrieved March 2, 2010 from http://jobview.monster.com/Accounting-Manager-Job-Brea-CA-97209085.aspx Monster. (2010). Revenue Accounting Manager. Retrieved March 2, 2010 from http://jobview.monster.com/Revenue-Accounting-Manager-Sr-Accounting-Manager-Job- Arlington-TX-97092416.aspx Microsoft Corporation. (2011). Annual Report 2010. Retrieved 3 March, 2010 from http://www.microsoft.com/investor/reports/ar10/ Apple Inc. (2011) Investor Relations: Annual Reports & Financial History. Retrieved from https://www.apple.com/investor/ Weygandt, J., Kieso, D., Kimmel, P. & De Franco, A. (2009). Hospitality Financial Accounting. New Jersey: John Wiley & Sons, Inc. Read More