TUI UNIVERSITY

Lewis Taylor

Module 1 Case Assignment

ACC501: Accounting for Decision Making

Dr. Mary Dereshiwsky

April 19, 2010

ABSTRACT

To understand how well a company is doing, you really need to understand the

financial health of the company. This includes what kind of sales a company had in the

current or previous year. What are the sales projections for the next year? What kind of

debt does the company have and how soon does it all come due? What is the cash

situation for the business? Do they have enough on hand to meet their immediate

obligations? The answer to all these questions can be found in the financial statements.

There are 3 main parts to a financial statement that will give you this kind of information.

They are the Balance sheet, the Income Statement and the Statement of Cash Flows.

Together with the financial notes at the end of the financial statements, an investor can

gain a lot of insight into how well a company is performing as well as what could

possibly lie in its future.

In this paper, I will discuss what the various sections of a financial statement say

and how they can help in understanding a company’s bottom-line. In addition to this, I

will use the financial statements from a couple of different companies to do a basic

analysis of their bottom-line.

Financial Statements

There are some important accounting principles that need to be understood in

order to make sense of a financial statement. These principles are the foundation for an

accounting system that allows for companies to be compared on equal footing. A lack of

standardization really could and has lead to companies and organizations reporting the

health of their company in a way that enables them to present the most favorable view

possible whether it is totally accurate or not. This would result, and has resulted, in an

inability of investors to be able to make sound judgments as to the true health of any

given company. Additionally, it would prevent investors from making comparisons

between two like companies. If two different hamburger joints, for example, reported

their sales and earning in completely different ways, it could lead to an inability to

compare the overall health of the restaurants on equal terms. It would be like comparing

apples to oranges.

So, the first concept used to standardize accounting is the Generally Accepted

Accounting Principles (GAAP). GAAP, in a nutshell, is a set of rules that are used by

corporations worldwide to record and summarize transactions and in preparing financial

statements for any given corporation. The Financial Accounting Standards Board, or

FASB creates the GAAP standards. FASB is a non-governmental organization whose

mission is to “establish and improve standards of financial accounting and reporting for

the guidance and education of the public, including issuers, auditors, and users of

financial information.”1 FASB is also recognized by the SEC as the authoritative body

for accounting standards as well as by the American Institute of Certified Public

Accountants. GAAP allows companies to be analyzed on an equal footing; apples to

apples and oranges to oranges.

The next concept is Double Entry Accounting. To understand this, we must

understand that just like in physics, every financial transaction has an equal and opposite

transaction. By that, I mean that for every asset gained, something had to go out to

acquire that asset. Double Entry Accounting accounts for those reactions. It explains

1 "FASB: Financial Accounting Standards Board." FASB: Financial Accounting Standards Board. N.p., n.d. Web. 21 Apr. 2010. <http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176154526495>.

how transactions occurred and where “things” came from, or in other words, it explains

what I have and how I got it.

Next, Historical Cost is the cost of an item at the time it was originally purchased

or acquired. It does not, however, represent the present value of that item.

Accrual Basis Accounting and Cash Basis Accounting are accounting methods

that essentially show what has actually happened versus what will happen at a future

date. Accrual Basis Accounting records all transactions at the time the transaction was

entered into regardless of whether items had yet changed hands. Cash Basis Accounting

only records the transaction once the exchange of goods or services has happened.

Accrual accounting uses notations such as accounts receivable and accounts payable,

were cash basis does not.

Lastly, Current Assets and Liabilities vs. Non-Current items details those assets or

liabilities that will become liquid or be paid out in that current reporting period vs. those

assets or liabilities that will not.

All of these accounting tools help investors, creditors or auditors get credible,

transparent, and comparable financial information for the companies they are analyzing.

Analysis of Financial Statements

In my comparison of these three multi-national companies, I needed to calculate a

few ratios and calculations to help determine performance. I calculated the debt to

equity ration, the operating margin, the working capital and the inventory turn-over for

each of the companies. I was not able to calculate a comparable inventory turnover ratio

for RTL, however, given that it is an entertainment company and does not have inventory

in the same sense as that of Samsung or Lockheed. All calculations were done for

reporting period 2008.

Results

Looking at the Debt-to-Equity ratio, which shows every dollar of debt to every

dollar of shareholder investment, I find that RTL has the lowest at .42. This means that

they essentially have the lowest debt compared to shareholder investment. This makes

sense to me since, of the three, they have the least amount of need for inventory storage

and manufacture, as compared to Samsung and Lockheed. Samsung had a debt-to-equity

ratio of .73 and Lockheed was 10.67. Lockheed should be larger given the cost of the

items that they manufacture. The more expensive the raw materials are, the more money

they may need to borrow to purchase those materials. And depending on what it is they

are making, it may take longer to recoup those costs and repay that debt due to the time it

takes to manufacture that item and deliver it to the customer. Samsung has a rapid

inventory turnover indicating that they are able to build and move their goods more

quickly then Lockheed. Lockheed, which mostly builds and sells large items such as

aircraft, spacecraft and ocean vessels, requires many months to years to manufacture 1

item. Their turnover was 20.02 were Samsung turned over inventory at a ratio of .95.

Two metrics where Lockheed seems to be sitting pretty is in working capital and in

operating margin. For 2008, Lockheed had a working capital of 21.2 Billion dollars and

an operating margin of 14.74%. Lockheed appears to operate at a fairly high margin

compared to Samsung and RTL (4.9% and 8.1% respectively), where as Samsung turns

over its inventory far more frequently.

All three of these companies look to be healthy and in a position to be profitable

in the future, barring uncontrollable events like economic downturns and such. Lockheed

has the largest margins, but that does not always equate to greatest profitability,

especially since they turnover inventory so much slower then Samsung.

Conclusion

There are a lot of good tools available for investors, creditors and auditors alike to

use as they analyze publicly traded companies. The various standards that are established

through FASB via GAAP enable the public to make intelligent decisions when it comes

to deciding on whether or not to invest in, lend money to or become involved with any

given company(s). It truly pays to learn these tools and practice them. The exercise for

this module won’t make anyone an expert by any means, but did give a basic

understanding of what info is available for use.