Financial Analysis Questions: Revenue, Income Tax and Expenses, Accounts Receivable, Inventory, and

Horizontal analysis and revenue assessment from the income statement

Requirements:  The questions are highlighted in red.  Please respond to each question using black font below each question.

1.  Examine revenue and related accounts.  Revenue is the largest item on the income statement, so we need to assess it on a quantitative and qualitative basis.  

a. Explain what horizontal analysis is and why it is useful in the analysis process. Compare the horizontal analyses for the income statements of the two companies that I have prepared in the Excel Horizontal Analysis attachment. Analyze each company over the last two years to identify two account changes that should be investigated for each company.  You need to provide the specific percentage information provided in the horizontal analysis.  Do not reference a computed figure on the income statement like Gross Margin, but a specific account. Explain why you picked these two different accounts for each company?

b. Read the management’s discussion and analysis (MD&A) section of the 10-Ks, which is found in Item 7 of the table of contents.  Explain how the companies’ senior managers explain net sales and gross profit in the most recent fiscal year.  Provide the page number(s) you are using from the 10-K as your reference to this question.

c. Find the footnote or notes to the financial statements on the operations of the business and segment information. Provide a short summary of what the company considers their business and segments.  Also, provide the page number you found this information.  Remember that the notes to the financial statements are an integral part of the financial statements, so are part of Item 8 and follow the audited financial statements.  Provide the page number you found this information.  

d. Find the footnote or notes to the financial statements on sales revenue recognition and gift card revenue recognition policy if applicable.  Provide how the company recognizes revenue.  Also, compare the revenue recognition to each other.  

2.  Examine the income tax expense on the income statement, the deferred tax assets and liabilities on the balance sheet, and the applicable footnotes or notes to the financial statements for both companies for the current year in the 10-K.  Answer the following questions:

a. Complete the table provide below with the following information using the footnotes or notes to the financial statements: total provision for taxes or Total income tax expense (benefit), Federal current, federal deferred portions, and page number for each company. 

In Thousands Total Provision for taxes or total income tax expense(benefit) Federal current taxes Federal Deferred taxes Page number reference

BBBY

PIR

b. Read the footnotes or notes to the financial statements and give the current company’s effective tax rate or provide the rates that influence the effective tax rate.  Is it a consistent rate from the previous years?  If not, do the fluctuations seem reasonable?  Provide the page number of the note that provided this information.

c. Using the footnotes or notes to the financial statements give the category and dollar amount of the largest deferred tax asset and deferred liability for each company along with a page reference.  Explain why deferred taxes occur. 

3.  Focus on Accounts Receivable, bank credit cards, and cash and cash equivalents.

a. Explain what Accounts Receivable is and if a company did have accounts receivable which financial statement would this account appear? 

b. Do these companies show accounts receivable on a financial statement?  If a company shows accounts receivable on a financial statement, please provide the amount, too.

c. Review the notes to the financial statements and explain where the company includes bank credit cards.  Provide the page number of where you found this note.

d. Explain what a bank credit card is and compare how each of the companies recognize bank credit cards.

4.  Analyze the inventory account and answer the following questions using the financial statements and notes to the financial statements:

a. Explain what inventory is and how these companies use inventory in their business.  Which financial statement shows inventory?  What section of the statement does this account appear?  What has been the dollar change from the past year for each company?  Make sure you identify the dollar amount change and if it is an increase or decrease.  

b. Using the footnotes or notes to the financial statements identify how the company is costing inventory and the inventory costing method each company is primarily using.  Provide the page number of the note you are referencing.

c. Compute the average day’s inventory outstanding for the current and past year for each company and show your calculations. Review pages 6-12 and 6-13, which shows the formula as 365 times Average Inventory/ Cost of Goods Sold.  To determine the average inventory use the current year and past year inventory divided by 2, since the ending inventory of one year is the beginning inventory of the next year.  Cost of Goods Sold is the same thing as Cost of Sales.  Round to the nearest day.  You can find this information on the current 10-K except for the following information for 2017 Inventory for BBBY $2,905,660 thousand and PIR $400,976 thousand. Comment on your results including a comparison of the two companies. You must show your work to earn full credit.

Business and segment information from the notes to the financial statements

Rounded  to the nearest day Current year Past year

BBBY

PIR

d. Does the company face any inventory related risk? You need to use the 10-K Part 1A Risk Factors for both companies and find at least one risk factor that relates to inventory for each company. Comment on the risk factor you picked for each company.  Provide the page number that you are referencing in this question.   

e. Compute Days Payable Outstanding (DPO) for the current and past year for each company and show your calculations.  Review page 6-14, which shows the formula as 365 times Average Accounts Payable/Cost of Goods Sold.      Cost of Goods Sold is the same thing as Cost of Merchandise Sold.  Round to the nearest day.  You can find this information on the current 10-K except for the following information for 2017 Accounts Payable for BBBY $1,179,088 thousand and PIR $68,981 thousand. Comment on your results including a comparison of the two companies. You must show your work to earn full credit.

Round to the nearest day.  Current Past year

BBBY

PIR

5.  Analyze the net fixed assets (PPE-Property, Plant, and Equipment) and answer the following questions:

a. Look at both companies’ financial statements in respect to Property Plant or equipment or fixed assets owned by the corporation.  Is Property and Equipment, net significant for each company?  You should provide the percentage Property and Equipment, net as a percentage of total assets in the current year from the vertical analysis in Part two to explain the significance.    What financial statement did you look at to find the fixed assets?

b. Using the notes to the financial statements, answer the following questions for each company and provide the page number of your reference.  What exactly are included in the companies’ property and equipment as listed in the notes to the financial statements? What depreciation method are they using for financial reporting?

c. Are any long-lived assets impaired per the notes to the financial statements for each of the companies?  Provide how each company determines impairment of long-lived asset per their notes.  Is the impairment charge significant?  Provide the page number of the note you are using as a reference.

d. Did the company buy any fixed assets or capital expenditures during the year using cash?  Provide the name of the financial statement you used to determine if the company bought fixed assets for cash, provide the amount purchased in current year, and the section of the financial statement you found this information in along with the label used to show that cash was paid for fixed assets?  Companies use different labels when they are purchasing fixed assets, so make sure you do not overlook this cash purchase, which might be worded differently.

e. Compute the PPE turnover (sales/Average PPE Assets, net) for the current and past year for both companies? Show your calculations and show two decimal points.  Please review pages 6-25 and 6-26.  The formula is shows as Sales/Average PPE, net.   You can find this information on the current 10-K except for the following information for 2017 Net Property and Equipment for BBBY $1,837,129 thousand and PIR $191,476 thousand. You need to show your calculation.   Comment on your results.  I am looking for more than a one-sentence comment that I can see from the numbers given.

Show your calculations and show 2 decimal points.  Current Past

BBBY

PIR