EFFECT OF INDUSTRY CHARACTERISTICS ON FINANCIAL STATEMENT REIATIONSHIPS
Effective financial statement analysis requires an understanding of a firm's economic characteristics. The relationships among various financial statement items provide evidence of many of these economic characteristics. Exhibit 1.I 4 presents common size condensed balance sheets and income statements for 12 firms in different industries. These common size balance sheets and income statements express various items as a percentage of operating revenues (that is, the statement divides all amounts by operating revenues for the year). The last line of Exhibit 1.14 also shows the cash flow from operations to capital expenditures ratio.
1. AK Steel: Manufactures and sells a broad line of steel products.
2. Allstate Insurance: Sells property and casualty insurance, primarily on buildings and automobiles. Operating revenues include (a) insurance premiums collected or due from customers and (b) revenues earned from investments made with cash received from customers before Allstate must pay customers' claims. Operating expenses include amounts actually paid or expected to be paid in the future on insurance coverage outstanding during the year.
3. Gillette: Manufactures and sells a variety of consumer personal care and household products. Gillette has acquired several branded consumer products companies in recent years.
4. Hewlett-Packard: Develops, manufactures, and sells computer hardware. The firm out-sources many of its computer components.
5. Household International: Lends money to consumers for periods ranging from several months to several years. Operating expenses represent estimated uncollectible loans.
6. Interpublic Group: Creates advertising copy for clients. Purchases advertising time and space from various media for sale to clients. Operating revenues represent the commission or fee earned by Interpublic for advertising copy created and media time and space sold. Operating expenses include compensation paid to employees. Interpublic has acquired other marketing services firms in recent years.
7. Kelly Services: Provides temporary office services to business and other firms. Operating revenues represent amounts billed to customers for temporary help services, and operating expenses include amounts paid to Kelly temporary help employees.
8. Lands'; End: Sells apparel through catalogs, primarily through third-party credit cards.
9. May Department Stores: Operates several department store chains nationwide. Offers its own credit card.
10. McDonald's: Operates fast food restaurants worldwide. A large percentage of McDonald's restaurants are owned and operated by franchisees. McDonald's frequently owns the restaurant buildings of franchisees and leases them to franchisees under long-term leases.
11. Newmont Mining: Mines for gold and other mineral s. Research and development expense includes exploration costs for Newmont.
12. Wendy's: Operates fast food restaurants worldwide. Wendy's owns a large percentage of its restaurants.
Required -
Use whatever clues you can to match the companies in Exhibit I .14 with the 12 firms listed above. Provide support for conclusions reached using the financial statement relationships provided and your knowledge of the industries' characteristics.
G. T. Wilson Company -
Evaluate the credit risk (liquidity and solvency) of G. T. Wilson Company using the data below. Be sure to discuss in depth the Cash Flow statement.
Attachment:- Assignment Files.rar