ACCT5111 Yinglei Zhang
Instruction of Group Project
OBJECTIVE
The Financial Statement Analysis project involves a team of 5 to 6 participants analyzing financial
statements of two companies from the same industry and preparing a written report. This project will help
participants develop the ability to understand, analyze, and make decisions based on financial
information—these skills are essential to every professional business career.
DESCRIPTION
In this Financial Statement Analysis project, teams are given the task of reviewing the annual reports of
two companies whose primary operations are within the same industry. The team will be analyzing each
company’s annual report. The main responsibility in making this project is to draw conclusions from the
data that has been gathered, determine the relevant position of each of the corporations in all of the
analyses performed, and do so in a way that is understandable to others. The team must prepare a
prospectus of not more than fifteen (15) pages, including title page, which describes the team’s analyses
and recommendations. A prospectus is a short description of the analyses and must include the following
sections:
1. Executive Summary
2. Horizontal Analysis
3. Vertical Analysis
4. Ratio Analysis
5. Earnings Quality Analysis
6. Conclusions/Recommendations
SECTION 1: EXECUTIVE SUMMARY
This section provides a brief overview of each of the two corporations. Participants are not limited but, at
a minimum, should provide the following information for both companies:
• Official name of the corporation
• Location of the corporate headquarter
• Stock symbol of the corporation and the exchange on which it is traded
• Fiscal year-end of the corporation
• Date of the annual report (10-K) filing according to the financial statements provided
• The company’s independent accountant/auditor
• The primary products(s) and/or services (s) of the corporation
• The major competitors of the corporation
SECTION 2: HORIZONTAL ANALYSIS
Horizontal Analysis is used as a tool to evaluate data and trends over time. Most financial statements will
have at least three years of data on their Income Statement and two years worth of data on their Balance
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Sheet. Horizontal Analysis is used to do intra-company analysis and expresses information as a
percentage change. The calculations used to determine the answers for the horizontal analysis must be
included in the appendix. For EACH of the two corporations, please complete a horizontal analysis for at
least the last four years in order to determine the trend in the data over time.
The analysis must include the following: • Revenue • Gross Profit • Net Income • Income from
Continuing Operations • Net Cash from Operating Activities • Assets
Which Company is experiencing more growth? Where is the growth coming from? Present your results in
graph(s) in order to demonstrate the trend.
SECTION 3: VERTICAL ANALYSIS (COMMON-SIZE ANALYSIS)
Vertical/Common-size analysis expresses items in a financial statement as a percentage of a single or base
amount. This allows analysis of two or more corporations of varying sizes.
SECTION 4: RATIO ANALYSIS
Please compute the ratios for the following categories: • Liquidity • Coverage • Activity or Efficiency •
Profitability • Market or Valuation
Teams must calculate the ratio for the most recent four years. Present, in chart or graph format, each ratio
for each of the corporations. The calculations used to determine the answers for the ratio analysis must be
included in the appendix. For each ratio, under the assumption of “no quality concern”, please comment
on:
What is the relative position of each of the corporations?
What is being measured?
What does it mean?
At the end of each category/section, comment on: As a category,
what is being measured?
Who are the users of this information?
Which company is in the best overall position?
SECTION 5: EARNINGS QUALITY ANALYSIS
Please analyze each major account on the Balance Sheet and Income Statement, and also read the Cash
Flow Statement to see whether you can locate the trace of possible earnings misstatement. Hints are
provided, but not limited, below:
Incentives:
Any change of auditors, CEO/CFO?
Earnings are just above an important benchmark?
Issuance of capital or any M&A transaction?
High Leverage?
Balance Sheet:
Abnormally high accrual or low accruals for each individual B/S account?
Any “cookie jar reserve” or reverse of the reserve?
Repeated on- time items, such as write off/down?
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Excess capitalization?
Large, unexplained changes in unearned revenue or accrued expenses?
Income Statement and Comprehensive Income”
Big change in R&D and advertising intensity?
Big amount of gains or losses?
Big amount of dirty surplus?
Extreme earnings?
Big book-tax difference?
Other:
Any changes in accounting policy?
Off-Balance Sheet Transactions?
Special Purpose Entity?
Operating vs. Capital Leases?
Adequate Disclosure?
Enough information for contingency? write-down/off?
Reasonable assumptions for the discount rate applied to pension assets/liabilities?
After conducting the earnings quality analysis, please re-check your interpretation of ratios. Are you
concerned about the quality of inputs to calculate those ratios? The earnings growth trend (if any) is
trumpet or not?
SECTION 6: CONCLUSIONS/RECOMMENDATIONS
Draw conclusions from the data that was gathered in Sections 2 - 5, and determine the relevant position of
each of the corporations in all of the analyses. The conclusions/recommendations must address the
following as a comparison between the two companies.
1. What are the overall strengths and weaknesses of each corporation?
2. What recommendation would you make to current and potential private or organizational investors in
the two corporations?
3. What recommendation would you make to lenders regarding the credit-worthiness of the corporations?
4. Position, salary and benefits being equal, which company would you prefer to work for?
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