Financial accounting - Essay Example

? FINANCIAL ACCOUNTING ESSAY Table of Contents Table of Contents 2 Introduction 3 Assets 3 Use of Technology and Revenue Generation 4 Asset Valuation5 Source of Funds 6 Conclusion 7 References 8 Introduction Ford Motor Company is one of the leading automobile manufacturing companies of the world which was founded by Henry Ford in the year 1909 (Yahoo Finance, 2012). It is headquartered at Dearborn, Michigan, USA. The company has remained under family ownership ever since (Bender, Slade, and Thorpe, 2009, p. 4). Ford Motor conducts its business in two different business segments namely, automotives and financial services sector. This report entails about the assets utilised by the company to carry on its business activities. This report also analyses the technological and other means through which the organisation generates revenue out of its assets. The process of asset valuation used by Ford Motors has also been included in this study. Finally the various sources of funds utilised by the company to conduct its operational activities have been discussed in this study. Assets The consolidated balance sheet of Ford Motors Company includes various types of assets owned by the company. Some of those items are: cash and cash equivalents, marketable securities, finance receivables, investment in operating leases, inventories, property, deferred income taxes and intangible assets. As at 31 December 2011, Ford Motors had $18,618 million as marketable securities (Ford Motor Co., 2012). Marketable securities are a form of assets which helps in storing excess cash that can help to generate return for the company (Fabozzi, and Peterson, 2003, p. 645). Ford Motors is found to have invested in the marketable securities of automotive and financial services sector. Total assets of the company in the form of investment in operating leases were $12,838 million as on 31 December 2012 (Ford Motor Co., 2012, p. FS-4). Those operating leases mostly consisted of lease contracts for vehicles with all its different types of existing customers. Accounts receivables are mainly in the form of finance receivables which amounted to $69,976 million as at 31 December 2011. Other receivables amounted to $8,565 million (Ford Motor Co., 2012, FS-4). The finance receivables correspond to the automotive and financial services sector. The notes receivables in the automotive sector are primarily related to the purpose of restructuring the businesses of the company and loans with the suppliers. Ford Motor Credit Company LLC which is a wholly owned subsidiary of Ford motors offers different types of automotive financing products all around the world. Ford Credit's business activities mostly consist of supporting its dealers and financing the vehicles. This results in a large portfolio of leases and finance receivables for the company. The total inventories of the company as at 31 December 2011 were $5,901 million (Ford Motor Co., 2012, FS-4). The inventories of the company consisted of raw materials, work-in-process and supplies which amounted to $2,847 million at the end of the financial year 2011. The finished products amounted to $3,982 million and total inventory is calculated as $5,901 million after adjusting on the basis of (Last in First Out) LIFO. Thus the inventories of Ford motors are lean in nature because they follow the build to order strategy (Ford Motor Co., 2012, FS-38). The inventories of the company which is primarily the service part obsolescence amounted to an ending balance of $249 million as at 31 December 2012 (Ford Motor Co., 2012, p. FSS-1). Use of Technology and Revenue Generation Revenues are recognised by the companies in United States mostly in accordance with the US GAAP (Nikolai, Bazley, and Jones, 2009, p. 931). Revenues from the automotive business segment of Ford Motors are generally generated through sales of automobiles and its accessories. Revenues are recorded in the books of account of the company only after the risks and rewards of ownership related to the products are completely transferred to its customers. The customers of the company mainly include distributors and dealers of automobiles. The vehicles which are sold by the company to various rental companies constitute as operating leases. These types of assets owned by the company are subject to guaranteed repurchase options. The difference between the amounts of guaranteed repurchase and the proceeds from the sale of vehicles is recognized as automotive revenues over a period of around eight months utilising the straight-line method. The revenues generated through the company’s investments in marketable securities are recognised as non-operative income of the company. As regards the financial services business segment of Ford Motor, the revenues are primarily generated interests received from finance receivables. This type of revenues generated by the company is recognised utilising the interest method. Asset Valuation Various assets of the company in the form of cash and cash equivalents like time deposits, money market instruments, etc. are valued at par value. The prices of the marketable securities owned by the company are derived mostly from different pricing services. In the absence of pricing data the company values its marketable securities using the various standard valuation models and is based on the income approach. The notes receivables are first recorded at fair value and then evaluated at amortised cost. All the inventories of the company are recorded at their costs or market value, whichever is lower. The new assets that are acquired by Ford Motor are capitalised only if it is expected that those assets can be utilised for more than one year and its acquisition cost is greater than $2,500. The equipments and properties of Ford Motor are depreciated using the straight line depreciation method over the total estimated useful life corresponding to each of the assets. The leased assets of the company are depreciated using straight line depreciation method. The inventories of Ford Motors are stated in the balance sheet at the lower of market value or the original cost of inventory. Source of Funds One of the primary activities of any business organisation is to raise fund for carrying out its operational activities in an effective and efficient manner (Sofat, and Hiro, 2008, p. 327). The business operations of Ford Motor are carried out utilising funds that are derived from a number of sources. If we look at balance sheet presented by the company it can be found that the capital structure consisted of both debt and equity components. The total debt component of the company’s capital structure amounted to around $84.7 billion as at 31 December 2011. As compared to this the total equity component amounted to around $8.9 billion as at 31 December 2011. The debt of Ford Motor consisted of both long term and short term debt instruments that included unsecured debt securities, bank borrowings, borrowings from other lenders and convertible debt securities. The debt is recorded in the balance sheet of the company at par value which is again adjusted for unamortised premium or discount and various adjustments that are related to the fair value hedges. The short term debt of the automotive sector of the company which mainly consisted of loans taken from non-affiliates and US Department of Energy (DOE) amounted to around $1,033 million. The long term debt of the automotive sector of Ford Motor mostly consisted of unsecured debt securities and loans taken from DOE. It amounted to around $13,094 million at end of the fiscal year 2011. The short term debt components of the financial services sector of Ford Motor mainly constitutes of asset backed commercial papers and the Ford Interest Advantage program run by the company. Its value at the end of the year 2011 was $16,596 million. The equity capital of Ford Motor Company consists of common stocks and class B stocks. As at December 31 2012, the company had a total of 2016 outstanding Convertible Notes amounting $883 million and 2036 number of outstanding Convertible Notes amounting to $25 million. Fresh shares were issued by the company in 2009 which amounted to 345 million common stock with a per share value of $4.75. The average number of basic and diluted shares of Ford Motor outstanding at the end of the fiscal year 2011 was 3,793 millions. Conclusion The analysis of Ford Motor’s business operations suggest that the company has been successfully running its business at present. The company management has been effectively utilising the existing resources and assets of the company to generate returns for the shareholders of the company. Moreover the company’s accounting policies comply with the US GAAP regulations and hence its corporate governance is also strong. The assets of the company mostly includes cash and cash equivalents, marketable securities, finance receivables, investment in operating leases, inventories, property, deferred income taxes and other intangible assets. The company operates its business through two different business segments namely the automotives sector and the financial services sector. The products of the company manly include automobiles and its parts and accessories and are mainly sold to the distributors and dealers of the vehicles. Most of the revenues are generated through sales of vehicles all over the world. Apart from this the financial services sector of the company also contributes towards the revenue generation through the interests received from the finance receivables. The intangible assets f the company is mostly depreciated using the straight line method. The business operations carried on by the company through funds obtained from various sources that includes both debt and equity instruments. References Bender, R. D., Slade, B., and Thorpe, J., 2009. Strategic Report for Ford Motor Company. [pdf] Available at: [Accessed 16 November 2012]. Fabozzi, F. J., and Peterson, P. P., 2003. Financial Management and Analysis. 2nd ed. New Jersey: John Wiley & Sons. Ford Motor Co., 2012. 10-K: Annual Report 2011. [pdf] Available at: [Accessed 16 November 2012]. Nikolai, L. A., Bazley, J. D., and Jones, J. P., 2009. Intermediate Accounting. 11th ed. Connecticut: Cengage Learning. Sofat, R, and Hiro, P., 2008. Basic Accounting. New Delhi: PHI Pvt. Ltd. Yahoo Finance. (2012). Ford Motor Co. (F): Profile. [pdf] Available at: [Accessed 16 November 2012]. Read More