The accounting information of this paper provides a financial statement analysis for three distinct companies: Mercedes Benz, a foreign manufacturer of vehicles; Macy’s Inc, a retail department store, and American Airlines, an airline company. The analysis for each company includes the quick and current liquidity ratios, the DuPont ratio, profit margin, asset utilization, and financial leverage.
Discussions in this paper include how the differences of each industry affect presentations as they relate to different International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) measurement conventions, and on how uses of the cash basis of accounting differ from the accrual basis of accounting. Mercedes Benz (dollars are in millions)
In 2009, Mercedes Benz had a total of $27,964 in current assets and current liabilities of $27,579 (Daimler AG, 2010). To determine the current liquidity ratio, we divide current assets into current liabilities, which is a total of $1.013. This represents an acceptable liquidity ratio that means if Mercedes Benz had to pay off their liabilities, they could do so without running into financial trouble.
To calculate the Quick Ratio, we subtract current assets from stock and then divide by current liabilities. This gives a result of $.8373 that indicates the company is at risk and not attractive to investors and stockholders. Mercedes Benz should be careful with investments to ensure they are not excessively risky. Mercedes profit margin in 2009 was 5.23% with an expected 10% climb in 2010 and asset utilization was at 0.66 in 2009 (Daimler AG, 2010). Macy’s (dollars are in millions)
Macy’s Current Liquidity Ratio for 2009 was $1.314 (Macy’s Inc., 2010). Current assets were $6,740 and current liabilities were $5,126. The Quick Ratio was $.384 with stock at $4,769 (Macy’s Inc., 2010). Macy’s scenario is similar to that of Mercedes Benz with an acceptable liquidity ratio but at risk to investors and stockholders. Macy’s 2009 profit margin was 1.5% that was up significantly from -20% in 2008 (Macy’s Inc., 2010). Macy’s asset utilization for 2009 ended at 1.1, (Macy’s Asset Utilization, 2010). American Airlines (dollars are in millions)
American Airlines’ current assets were $6,642 and current liabilities were $7,728 in 2009 (AMR Corporation, 2010). The current liquidity ratio calculates to $.859 and the quick ratio to $.787 with stock at $557 (AMR Corporation, 2010). 2009 profit margin was slightly low at -.19% and Asset Utilization was at 0.64 (AMR Corporation, 2010). In comparison to the other companies, American Airlines is in the least favorable financial position (Mercedes Benz is in the best financial position). Cash versus Accrual Accounting
The two primary accounting methods are cash basis and accrual basis. All three of the companies in this paper use the accrual basis of accounting. Accrual accounting is the system used to maintain an up-to-date tally of a company’s income and expenses by posting them as they occur so all sales are recorded immediately (Tatum, 2003-2010). This makes it easier to determine the financial stability of a company.
Cash basis accounting waits until money is exchanged before recording the transaction, therefore a company has no way to track or record money owed from clients at a later date. Cash basis is usually incorporated by small businesses because of its ease of use but is usually discarded as the company grows. IASB and FASB
The three companies of discussion in this paper represent three different industries. None of the industries are interrelated or dependent upon the other. They all have the common task of having the responsibility to follow certain guidelines and procedures in their financial reporting presentations.
The companies must follow the guidelines of the IASB or the FASB. The IASB sets international principles underlying the preparation of financial statements. It represents the foundation of international accounting (IASB, 2010). The FASB is a private board that sets the standards for the United States. The FASB makes sure standards make information accessible and understandable for the public and investors in the U.S. They define fair values and framework for fair values in (GAAP) Generally Accepted Accounting Principles (FASB, 2010).
The two boards are working on joining to form one common set of standards that will rule internationally. The merger is not formally completed but they are already working together to create new rules that affect presentations across-the-board, i.e. according to The Economist (2010), “businesses may have to start putting leases on their balance-sheets” (Business & Finance, para 1). This is an example of an across-the-board rule that would affect any industry that leases equipment, property, or any item, and they must record it to their liabilities column.
Mercedes Benz currently follows the standards of International Financial Reporting Standards (IFRS) because it is a foreign owned company. These standards are more principle-based and require more judgment than American accountants are use to in their accounting procedures. The retail industry’s current IFRS application practice is diversified (IFRS, 2010). Retailers in the industry follow IASB and FASB guidelines that cause conflict at times concerning how to resolve certain financial reporting issues.
“There has been a fundamental shift in the basis of reporting with many global airlines converting to IFRS. The KPMG’s Disclosures Handbook 2005-2006: Accounting and Financial Reporting in the Global Airline Industry produced by KPMG’s Global Airline practice, took a first look at the IFRS and U.S.
Generally Accepted Accounting Principles (GAAP) disclosures and accounting policies line up. In order to highlight key financial reporting trends and issues impacting airlines, KPMG’s Global Airline practice surveyed the 2005 public financial regulatory filings of 23 of the world’s airlines that currently, or will in the near future, report under either U.S. GAAP or IFRS” (Steel, 2009, para.8). Conclusion
In our analysis of the three companies, we calculate the quick ratio and liquidity ratio using numbers from the balance sheets. The DuPont Ratios determine return on equity and is calculated using the profit margin, asset utilization, and financial leverage. DuPont ratios vary for each company and the asset utilizations measure the effective use of invested capital. When we view the differences of each industry, and how they relate to the IASB, FASB, and the cash basis or accrual basis of accounting, we realize that all of these measures collectively help us to determine the financial stability of these companies.
References AMR Asset Utilization. Retrieved on Sunday, September 26, 2010 from http://ycharts.com/companies/AMR/asset_utilization AMR Corporation Retrieved on Sunday, September 26, 2010 from http://www.google.com/finance?q=NYSE:AMR Daimler AG. Retrieved on Sunday, September 26, 2010 from http://www.google.com/finance?q=ETR:DAI Financial Accounting Standards Board, (2010). Retrieved September 2010 from http://www.fasb.org
IFRS Foundation. (2010). IFRS. Retrieved from http://www.iasb.co.uk/ International Accounting Standards Board, (2010). Retrieved September 2010 from http:// www.iasb.org Macy’s Asset Utilization. Retrieved on Sunday, September 26, 2010 from http://ycharts.com/companies/M/asset_utilization Macy’s Inc. Retrieved on Sunday, September 26, 2010 from http://www.wikinvest.com/stock/Macy's_Inc._(M) Steel, A. (2009). KPMG. Complying with regulations and reporting standards. Retrieved from http://www.kpmg.org
Tatum, M. (2003-2010). WiseGeek. Retrieved from http://www.wisegeek.com/what-is-accrual-basis-accounting.htm The Economist. (2010). Shocking new accounting rules. Retrieved from http://www.economist.com/node/16847810?story_id=16847810