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Choose another public traded company in the same industry as the one you chose in the Week 3 Discussion 1

Week 3 Discussion 1 – Types of Accounting Documents

Learning Objectives Covered

  • CO 04 – Demonstrate an understanding of fundamental accounting principles

Career Relevancy

Business managers need to be generally familiar with the types of accounting statements typically used by American corporations. These documents follow a common format and adhere to the Generally Accepted Accounting Principles to keep them consistent from one company to another. As a business manager, you will need to know how to use this information to make sound decisions for your department or company.

Background

Saskia was having trouble sleeping. She knew that if she did a little work, it would help settle her mind. She decided to read through the financial statements for Acme Widgets to help give her an overall sense of the company’s health.

Saskia remembered from her accounting courses that businesses typically kept six types of financial documents and followed consistent principles to ensure information was consistently reported, regardless of the industry or size of the business. This allowed potential investors, partners, or even buyers to quickly assess the financial health of the business.

The six documents Saskia brought home with her included the following (McQuarrie, 2019):

  • Income Statement: also known as the Profit and Loss Statement, Statement of Operations, or Revenue Statement. This was a list of every source of income owned by Acme Widgets, including sales and property leases. Also included were all direct costs included in creating the company’s products.
  • Cash Flow Statement: list of where cash flows in and out of a business in the categories of operations, investments, and financing. Cash Flow Statements show which areas are making the most money and which are spending the most. These types of records show areas that have a “negative cash flow,” spending more than earned. It also shows investors if a business is profitable or not.
  • Balance Sheet: shows if assets balance with liabilities on a certain day. Balance sheets rely on this accounting equation: Assets = Liabilities + Equity. Assets include both tangible and intangible assets. Liabilities are debts owned and other obligations. Equity is the amount that shareholders have invested in the company. Ideally, both numbers are the same. If liabilities + equity is higher than assets, then the business is losing money.
  • Accounts Receivable Aging Report: list of overdue invoices that covers when payments are due, how late they are, and how to contact the customer to collect.
  • Business Plan: map of where the business stands and where it’s headed. Because Acme Widgets shared its business plan with investors, the document was more formal than some Saskia had seen.
  • Budget Report: future projection based on the other financial documents. Budget reports estimate income and losses over a period. Acme’s report was for the next year.

It took Saskia about an hour to become familiar with Acme Widgets’ financial status—which was worrisome. She could see a dozen product lines that would need to be cut and two departments that should be merged. She knew she had to develop marketing approaches that would bring in new sources of revenue without adding to production expenses.

She was also ready now to drift away to sleep. For Saskia, accounting documents always seemed to have that effect.

References

McQuarrie, K. (2019, November 13). The 6 most useful financial documents for small businesses. Business.org. Retrieved on September 23, 2020. https://www.business.org/finance/accounting/most-useful-financial-documents/ (Links to an external site.)

Sources of Information

EDGAR – Search and access. (n.d.). US Securities and Exchange Commission. Retrieved on September 23, 2020. https://www.sec.gov/edgar/search-and-access (Links to an external site.)

Prompt

Choose a public traded company and find their annual report, their 10-K, as registered with the Security and Exchange Commission through their search application EDGAR (you could use some other method of finding their annual report such as on their investor’s Web site.) 

Look at their income statement, balance sheet, and their cash statement. Identify which items most are concerning to you, and how as a manager you would create a business improvement plan to make changes. 

For your citation, you could list the factors you believe is most important when judging the health of a business—and in which documents you are most likely to find those factors.

Reply Requirements

You must submit:

  • 1 main post of 200+ words with 2 in-text citations and references 

Week 3 Discussion 2 – Apples-to-Apples Comparisons

Learning Objectives Covered

  • CO 04 – Demonstrate an understanding of fundamental accounting principles

Career Relevancy

Making business comparisons will benefit you as a manager. You can discover promising practices that other businesses are doing that you may also want to adopt, so looking at how other businesses record their performance can be helpful.

Background

“I think we’ve narrowed down a few possible companies to choose between as we break into the app business,” wrote Daraius Chakrabarti in an email to Saskia. Daraius was the Vice President of Sales and Marketing for Acme Widgets.

Smartphones and smartwatches had become the Swiss Army Knives of technology, largely replacing the kinds of small electronic products Acme Widgets had built its empire upon for 70 years. The company still had brand recognition and tremendous assets. Its goal was to buy out a large app development company and create updated product lines.

“Have a look at their annual reports and share your thoughts,” continued Daraius in his email.

Saskia opened the attachments. Fortunately, the three reports were from companies in the same market. It’s always easiest to compare the strengths of companies from the same industry rather than, say, a software firm and a vacuum cleaner manufacturer. The goal was to set up an “apples-to-apples comparison,” a way of identifying a set of shared values that could yield an easy comparison. When comparison factors are too different, it’s called an “apples-to-oranges comparison” because—as the metaphor goes—an apple will never be the same as an orange.

Revenue Growth and Cash Flow

Saskia looked at three companies: Apps Galore, MobiLife, and Little Birdee. They each approached the mobile space differently, but their talent and programming catalog could be used to drive Acme’s goal of breaking into the smart device market. In their annual reports, the companies listed similar data.

Saskia went back five years to calculate revenue growth and cash flow from operations. Revenue growth showed sustained success in the marketplace, but it didn’t consider the money spent to generate sales. Cash flow from operations growth provided more insight into the business model’s sustainability (Stoffel, 2018). Of the three, Little Birdee grew at the fastest rate, 28.6 percent, but MobiLife had the best numbers in cash flow from operations at 57.4 percent.

Comparing Ratios

Next, Saskia looked at three different ratios for valuation: price-to-earnings (P/E), price-to-free cash flow (P/FCF), and price-to-earnings-growth (PEG). The P/E and P/FCF look back at past performance while PEG tries to value a company based on how much it could grow in the future. All three companies listed their P/E and PEG. Saskia had to take operations cash flow and subtract capital expenses, then divide the sum by the company’s market cap to get P/FCF (Stoffel, 2018).

Little Birdee looked good in this analysis, as well. The company was offering the highest P/E of the three, but this was balanced by its strong P/FCF and PEG projection.

Competitive Advantages

Business comparisons weren’t just a matter of numbers. Saskia knew that the market position would play a big part, too. She made sure she paid attention to how each company met consumer demands and introduced products people didn’t even know they needed yet. This was called “sustainable competitive advantages,” something her company needed to save itself from becoming obsolete (Stoffel, 2018).

Little Birdee’s apps were based on the concept of “universal notifications.” Users answered a questionnaire about things they needed to know or remember throughout their day, and Little Birdee apps watched emails and text messages to create custom notifications regardless of the source. The app could work with appliances, lighting, car starters, health monitoring devices, and other networked devices. MobiLife had similar apps but was more focused in the health care space. Apps Galore was the CEO’s favorite because of its diverse range of products that seemed to mirror Acme’s physical gadgets. However, Apps Galore’s products didn’t work well together. Each met a targeted need without addressing its customer’s overarching need to stay connected and informed.

“Little Birdee is my first pick,” replied Saskia in an email to Daraius. “They show strong growth and potential, plus they are positioned to help Acme Widgets with its goal of unifying brand approach. MobiLife offers similar advantages but is more limited. Stay away from Apps Galore though. It can’t help us move forward.”

References

Stoffel, B. (2018, October 4). How to compare companies. The Motley Fool. Retrieved on September 23, 2020. https://www.fool.com/how-to-invest/2015/01/16/how-to-compare-companies.aspx (Links to an external site.)

Sources of Information

EDGAR – Search and access. (n.d.). US Securities and Exchange Commission. Retrieved on September 23, 2020. https://www.sec.gov/edgar/search-and-access (Links to an external site.)

Prompt

Choose another public traded company in the same industry as the one you chose in the Week 3 Discussion 1 and find their annual report, their 10-K, as registered with the Security and Exchange Commission through their search application EDGAR (Links to an external site.) (you could use some other method of finding their annual report such as on their investor’s website.) 

Look at their income statement, balance sheet, and their cash statement. Make a recommendation on which one your company should acquire based on the information available. Explain why you made your decision and what factors you chose to prioritize while making this decision. 

For your citations, you could zero in on which factors shared by both companies weighed on your decision. For your peer response, you could evaluate your classmate’s proposal and discuss whether or not the logic is sound.

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