Overview
Discussion Questions
DQ1
Consider your current company, or a company that you have previously worked for, and describe and critique how financial statement analysis could be used for that organization. If you do not have relevant work experience, use the GCU Library to locate an article on financial statement analysis and compare the processes recommended by the article to those in the textbook. Your initial post should be approximately 250 words. To participate in follow up discussion, ask questions and post comments regarding classmates' posts, or respond to follow-up questions posted by the instructor.
Please include proper citations in your discussion post. Points will be deducted if proper citations are not used.
DQ2
Review Case 12.21 in your textbook. Share your observations and recommendations for the company based on the data provided. Please review the posts of your classmates before responding to Case 12.21; provide responses that are different than what your classmates' have posted and recommended.
To participate in follow up discussion, ask questions and post comments regarding classmates' posts or respond to follow-up questions posted by the instructor.
Please include proper citations in your discussion post. Points will be deducted if proper citations are not used.
12.21 (LO 1, 2, 3, 4) Comprehensive Financial Statement Analysis Using Exhibit 12.9 as a guide, compare C&C Sports’ performance to the industry averages. What particular observations and recommendations do you have for George Douglas, president of C&C Sports?
EXHIBIT 12.9 C&C Sports industry data
While it is relatively easy to determine C&C’s industry under either the SIC or the NAICS system, that is not the case for many companies. Consider General Electric, which you may think is in the light bulb business. GE does make light bulbs, but the company also makes locomotives, automotive bumper systems, aircraft engines, and magnetic resonance imaging (MRI) equipment. It even has a large financing division. No single SIC or NAICS code captures General Electric’s business, nor that of any other conglomerate. Even smaller companies that operate in more than one distinct industry are difficult to classify.
Reality CheckGrowing strong farms
Remember when your parents told you that drinking milk would help your bones to grow strong? Well, how does the dairy farmer who produces that milk help the farm to grow strong? One tool the farmer uses is financial ratio analysis.
After a financial crisis hit the farming industry in the 1980s, the Farm Financial Standards Task Force developed a set of financial statement guidelines that included 16 key financial ratios. The guidelines provided benchmarks against which farmers could compare their own performance. For instance, the task force recommended a current ratio of between 1.5 and 2.0, a debt ratio of less than 40%, and a debt-to-equity ratio of less than 0.67.
How does today’s farm compare to these guidelines? An Iowa State University report on 22 beef producers found a high degree of variability among them. Though the farms’ current ratios averaged 2.1, they ranged from a low of 0.4 to a high of 8.7. Return on equity averaged 9.3%, within a range of −8.1% to 45.9%.
Ratio analysis isn’t limited to the farmers’ financial statements, however. Dairy farmers can also monitor their performance by applying ratio analysis to their operational data. Two key measures for dairy farms are pounds of milk per cow (the benchmark is at least 17,500) and milk income per cow (the benchmark is at least $2,100).
Sources: John Berry, “Calculating the ‘Sweet 16’ Farm Financial Measures,” Penn State University College of Agricultural Sciences, http://extension.psu.edu/business/farm/management/... (accessed July 14, 2016); Richard D. Duvick, “Farm Financial Records: What Is Needed and How to Get Them,” Computerized Farm Record Keeping Bulletin 890-01 (Columbus: Ohio State University), http://ohioline.osu.edu/b890/b890_20.html (accessed February 17, 2013, site now discontinued); Ralph Mayer, Financial Benchmarks for Beef Producers, 2001 Beef Research Report A.S. Leaflet R1752 (Ames: Iowa State University, 2001); Larry F. Tranel and Gary Frank, Managing Dairy Farm Finances, ISU Extension Publication LT-105 (Ames: Iowa State University, 2002).
Industry Statistics
Developing an understanding of a company’s competitive environment is an important part of a financial analysis. Numerous resources are available to assist in this task. The U.S. government is a good source of industry data, much of which is available on the Internet. For example, the U.S. Census Bureau collects a wide array of statistics and makes them available on its website, http://www.census.gov/. Using the Census Bureau’s Annual Survey of Manufactures, C&C’s managers could determine the size of their market. Since this survey does not show baseball uniforms as a separate category, the managers must look at the market for men’s and boys’ team sports uniforms as a whole. As shown in Exhibit 12.10, shipments of these uniforms have been somewhat cyclical—increasing to 2003 and then falling to 2006, increasing to 2008 and then falling to 2011, and finally increasing to 2016. The decrease in shipments in 2009 was particularly dramatic, possibly a result of the general declining economic conditions in the United States and the resulting lower consumer disposable incomes.
A bar graph illustrates the value of sports uniform shipments for United States Men's and Boys teams. The horizontal axis represents Years ranging from 2000 to 2016 in increments of one year, while the vertical axis represents amount in million dollars, ranging from $0 to $300 in increments of $50. All values are approximate. The data in the graph is presented as follows: 2000: 185; 2001: 195; 2002: 215; 2003: 255; 2004: 235; 2005: 190; 2006: 185; 2007: 187; 2008: 190; 2009: 105; 2010: 95; 2011: 85; 2012: 105; 2013: 117; 2014: 120; 2015: 135; 2016: 138.