ACCOUNTING FOR DECISION MAKINGGSM 5301

“IDENTIFY THE INDUSTRIES”-FINANCIAL STATEMENT ANALYSIS-

DR. AHMED RAZMAN

GROUP 5

GROUP MEMBERS:

1. NOOR AHMED BROHI2. HAZEEM AZAM DAR3. NINA ROSELI4. VANESSA CHIN 5. ORJIKA PASCHAL

INTRODUCTION

Common size financial statements are expressed in terms of percentage, converted from the

financial statements expressed in dollars and also some selected ratios. There are two ways of

presenting them; vertically or horizontally. Such financial statements can be expressed

individually, e.g. common size balance sheet, common size income statement, common size

owner’s equity and common size cash flow statement. When analysing such statements, users are

able to draw an overview of companies on how well the company is doing, compared to players

of its own industries or even other industries. Users are also able to zoom into the details by

looking at the percentage of each item, to further justify before any conclusions are made.

PROBLEM STATEMENT

Common size financial statements are frequently used by analyst to track performance over

several years, or to compare different companies and/or industries at a point of time. Common

size balance sheets of 12 companies are presented in this report involving companies from major

business industries. Using the ratios, common size statements and other analytical tools, the data

needs to be analysed to identify all the companies presented in the statement.

ANALYSIS

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Based on the case study, 12 companies were chosen because they consist of primarily one major

business segment and the relationship between balance sheet items, profit and operations are

fairly typical of these industries. The 12 companies are;

1. Regional bank

2. Temporary office personnel agency

3. For-profit hospital chain

4. Warehouse club

5. Major passenger airline

6. Major regional utility company

7. Manufacturer of oral, personal and household care products

8. Hotel chain

9. Upscale department store chain

10. Discount department store chain

11. International oil company

12. Defense contractor

The first step is to categorize the companies into respectable industries. There were 5 industries

that have been identified, which are;

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1. Service Industry

2. Retail Industry

3. Manufacturing Industry

4. Oil and Gas Industry

5. Power and Utility Industry

The table below shows the categorization of companies and industries.

SERVICE INDUSTRY

RETAIL INDUSTRY

MANUFACTURING INDUSTRY

OIL AND GAS INDUSTRY

POWER AND UTILITY

INDUSTRY

Regional bank Warehouse club Manufacturer of oral, personal, and

household care

International oil company

Major regional utility company

Temporary office

personnel agency

Upscale department store

chain

Defense contractor

For-profit hospital chain

Discount department store

chain

Major passenger

Airline

Hotel chain

THE CHARACTERISTICS OF

INDUSTRIES

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Service Industry

Companies/ business that does work for customer(s) and occasionally provide goods, but not

involved in manufacturing. Generally, service industries does not stock inventory other than for

their office/ business supplies and tools. Thus, the first way of determining a service company is

by looking at its inventory. They would either have very little inventory or no inventory at all.

Another possible way of determining the service industry is by looking at the unearned revenue

value. This is because as a service company, upfront payments or booking will be made in order

to get the service.

Retail Industry

Businesses that purchase goods or products in large quantities from manufacturers directly or

through a wholesale, and then sells smaller quantities to the consumer. So, logically the

inventory stock and inventory turn should be looked at in determining whether it is a retail

company or not.

Manufacturing Industry

Manufacturing industry refers to any business that transforms raw materials into finished or

semi-finished goods using machines, tools and labor. Manufacturing sectors include production

of food, chemicals, textiles, machines and equipment. From the definition itself it is clear that the

plant, property and equipment value (PPE) of a manufacturing company would be tremendously

high. The value of inventory and inventory turn can also be considered in determining the

manufacturing company.

Oil and Gas Industry

There are two major sectors within the oil and gas industry, upstream and downstream. Upstream

is the process of extracting the oil and refining it, while downstream is the commercial side of

the business such as gas station or the delivery of oil for heat.

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Power and Utility Industry

Companies that that engages in the generation, transmission, and distribution of electricity for

sale generally in a regulated market. The power and utility industry is a major provider

of energy in most countries. It is indispensable to factories, commercial establishments, homes,

and even most recreational facilities. Lack of electricity causes not only inconvenience, but also

economic loss due to reduced industrial production. Electricity markets are also considered

electric utilities--these entities buy and sell electricity, acting as brokers, but usually do not own

or operate generation, transmission, or distribution facilities. Utilities are regulated by local and

national authorities. Companies in this industry will have a high PPE value because they would

need a big plant in order to carry out the generation, transmission and distribution process.

IDENTIFICATION

Company A 6 | P a g e

Major passenger airline (Service Industry)

We came to that conclusion for two reasons: 1) Airlines will have high unearned revenues. This

is because airline services usually involves advanced booking and paying without a proper

transaction or service being done. Once the service is done, only then they can recognize the

revenue as earned. 2) Airlines Property, Plant and Equipment account is high considering the fact

that airplanes are expensive and they are considered as PPE.

Company B

Upscale Department store ( Retail Industry)

We came to this conclusion because of two reasons. 1) Department stores always have high

inventory because they always need things at hand to sell them immediately. They need high

goodwill because these stores are ususally very expensive and they can afford to be expensive

because they are very popular and hence have high goodwill.

Company C

Manufacturer of oral, personal and household care products (Manufacturing Industry)

We came to this conclusion for three reasons. 1) they have very high turnover. 2) they have low

inventory because they sell products very quickly and this is why their inventory turnover is

high.3) they have huge PPE cause they need machinery and factory to produce their products.

Company D

Defense Contractor ( Manufacturing Industry)

We came to this conclusion because of their very high inventory as they have to sell a lot of

products at the same time to governments and other security organizations.

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Company E

Regional Bank (Service Industry)

Banks need to have a huge cash & bank balance as they are operating with money as their

medium. As per the exhibit, their cash & bank portion is the biggest out of all and supported by

the huge receivables (due to their deposit/investments with other banks) and payables (people,

companies and other banks deposits/investments). Low stockholders equity is also a point

because banks are highly leveraged where the banks are getting a huge portion of their financing

from others.

Company F

Warehouse club ( Retail Industry)

We came to this conclusion because of two reasons. 1) They have the highest inventory stock of

all which makes sense as these shops need many products in high quantity ready to be sold

immediately. 2) They have high PPE which could be because of the transportaion vehicles and

the storerooms they have purchased.

Company G

For- Profit Hospital Chain (Servive Industry)

That is so because of their very high PPE as they need a lot of space to keep patients, medicine,

house emergency staff etc.

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Company H

International Oil Company ( Oil and Gas Industry)

We came to this conclusion because of their very high goodwill. They are international company

and they work in a very competitive business like oil industry at that, they need to have a very

high goodwill from customers to succeed.

Company I

Major Regional Utility Company (Power and Utility Industry)

We came to this conclusion because of their low inventory and high ppe. As they are major

utility company, they will have high PPE from which they will drive utility to serve customers.

They also have low inventory which makes sense as they provide services more that products to

customers.

Company J

Hotel Chain (Service Industry)

We came to this conclusion for two reasons. 1) Hotel chains have high PPE because they need

many large properties to occupy customers and provide them services. 2)They also need high

goodwill to be successful as it is goodwill that determines their customer portfolio. The higher

their goodwill, the higher their standard will be and hence the quality of customer will be high.

Company K

Temporary office Personnel Agency (Service Industry)

We came to this conclusion for two reasons. They have low PPE as they have ouutsource most

of their functions. They have no inventory which supports our idea that it is a service company.

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Company L

Discount Department Store Chain ( Retail Industry)

We came to this conclusion for two reasons. 1)They have very high inventory. 2)They have high

turnover because they sell goods as soon as they purchase them. They dont keep stock for a long

time.

Other than analysing the financial statement given, another way of determining the company is

by comparing the annual report of similar companies in that particular industry. For example;

The Financial Statement of Malaysian Airlines (MAS)

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The Financial Statement of Perficient Inc, (Hospital),

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CONCLUSION

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The 12 companies has been identified on the basis of financial information provided in the exhibit 13-3

and grouped into five industries. It is concluded that without knowing the significant of financial ratios

and common-size financial analysis information it is difficult to identify the industries of companies.

Financial analysis information helped us in knowing the exact industries of company in which it is

operating. As we see above, on the basis of Inventory turnover ratio we have classified the manufacturing

company because manufacturing companies have high inventory turnover ratio because as they produce

goods they sell it. So in that way other ratios also helped in classification of different companies in

groups.

It shows that financial analysis tools are very important in knowing the industry of companies and also

knowing the financial soundness of companies.

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