FIN 324 Week 2 Learning Team Assignment Review of Financial Statements Paper
FIN 324 Week 2 Learning Team Assignment Review of Financial Statements Paper
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Running Head: Financial Statement Review Financial Statement Review BY Learning Team Members 12/13/2010 Financial Statement Review 2 When making a decision to acquire or merge with another company many items are to taken into consideration. Such as a quick review of the company’s business plan and mission statement, when that initial reviews pass, then a larger examination needs to be conducted this process is referred to as the due diligence process. During the second phase of the due diligence the audit groups needs to do a finite examination of the company’s financial results and projections. This process can take several months to complete (Due, 2003). To further understand the candidates for a possible merger the following needs to be reviewed and explained further. A brief summary of each candidate’s organization, what are its products and/or services, how long has it been in business and most importantly what accounting system and financial statements does it follow? Once this indepth review is completed a better understanding of value and future worth for the organization can be determined leading to better decisions on which direction to go. Two of the publically traded organizations in consideration for the proposal are J.C.Penney Company Inc, and J.M Smucker Company (AFLCIO, 2010). With more than 1,199 stores in the 50 states including Mexico, Puerto Rico, and Chile, J.C. Penney’s is the largest department store retailer and catalog business in the United States with licensing unions for its products all over the world (US Securities and Exchange Commission, 2010). This company enjoys the reputation of selling high quality products at fair prices to the public. This tradition continued even during the heart of the depression in the 1930’s. Their philosophy was to follow the golden rule. J.C.Penney Company, Inc became established by James Cash Penney in 1902 Financial Statement Review 3 (Hcnoline, 2010). The first J.C Penney store was open in Wyoming with several others following. By 1915 the company had 83 stores and sales well into the multimillions. A registered independent public accounting firm audited J.C Penney's financial statements in March 2010 J. C. Penney Company Inc. maintained, in all material respects, effective internal control over financial reporting they were well within auditing guidelines and internal controls (US Securities and Exchange Commission, 2010). J.M Smucker Company is a leading seller and manufacturer of fruit spreads, shortening and oils, peanut butter retail packaged coffee, sweetened condensed milk, ice cream toppings, health, and natural foods beverages in North America (FAQ, 2010). Smucker's®, Dunkin Donuts, Five Roses®, Eagle Brand®, Folgers®, Crisco®, Jif®, Pillsbury®, Hungry Jack®, R.W. Knudsen Family®, White Lily® and Martha White® in the United States, along with Robin Hood®, Carnation®, Europes Best® and Bick's® in Canada (Business Week, 2010). J.M Smucker was established more than 110 years ago, and shares a similar corporate value system as J.C.Penney, quality employees and ethical decisionmaking are characteristics that they attribute to their companies overall and outstanding success. The audit for J.M. Smucker was performed by an independent registered public accounting firm, and the J.M. Smucker Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2010, based on the COSO criteria (Ticker, 2010). After the review of each organization's financial statement it has been found that the two organizations are both publically traded companies with stable financial reputations with more than 100 years of financial experience. For this reason both of the abovementioned companies are stellar candidates for a corporate merger. Financial Statement Review 4 Financial statement information provides lenders and investors with a trusted basis for evaluating the past performance and future prospects of a company. Financial statements are used by groups including investors, creditors, and managers and because of this they are sometimes called general purpose financial statements. Three primary financial statements are balance sheets, income statements, and statement of cash flows. These statements provide answers to what the company’s current financial status is, what were the companies operating results for the period and how did the company obtain and use cash during the period (Albrecht, 2008). At JCPenny the financial statements that the company uses are the balance sheets and the statement of cash flow. A balance sheet shows information concerning the company’s assets that the company owns that has value. The balance sheet includes information on the company’s liabilities and shareholder equity. Liabilities can be amounts of money that a company owes to others. The shareholder’s equity is the money that would remain if a company liquidated all of the assets and paid all of the liabilities (Beginners, 2007). A cash flow statement reports the money that comes into a company and goes out of the company. Cash flow statements are important because a company needs to have enough cash on hand to pay the expenses and purchase necessary equipment and supplies to run the business. Cash flow statements show how a company has made money and also the changes over a period instead of the amount of money are generated. Also a cash flow statement uses the information from the company’s balance sheet and income statement. Cash flow statements are divided into three parts. The parts review the cash flow from one of three activities in operating activities, investing activities, and financing activities (Beginners, 2007). Financial Statement Review 5 At J.M. Smucker the company uses the balance sheet, cash flow and income statement. An income statement is a report that shows how much money a company owes over a certain amount of time. The income statement shows the cost of expenses associated with earning money. The statements also reports earnings per share. This calculation tells how much money shareholders will receive if the company decided to distribute all of the net earnings for the period (Beginners, 2007). As stated previously the following companies have similarities and differences. Additionally, there use of financial statements clearly shows identical accounting analysis throughout the years and added terms to accommodate their growth. The added bonus is shown within J.M. Smucker’s financial systems. They display an income statement that shows earning over time which is beneficial for shareholders. In figures 1 and 2 we have included financial statements for both companies. In figure 1 we see that J.C. Penney uses an accounting statement called “cash in transit.” Since this company is a retail store which often makes cash deposits sometimes these financial statements will understate the organization’s actual cash balance. Therefore they are recorded as cash receipts and must be added to the bank statement balance. In figure 2 for Smucker’s they input data associated with merger and integration costs. This relates to their success with merging their company with others of interest. The costs associated with mergers and acquisitions is clearly stated and remarked on the statement of cash flows. By integrating this cost into their records, they show expenses they may have included personnelrelated, transaction costs and integration/conversion expenses. This helps with our analysis of the two companies and how merging these two will develop from prior experience. Financial Statement Review 6 They also include weighted average shares which describes outstanding share and the changes that takes place as in issuing new shares, retiring existing or repurchasing shares. While there are similarities among the two accounting records we see that Smucker’s has a more streamlined method of accounting for their company. There indepth financial analysis defines more whereas J.C. Penney’s focuses on the basic accounting records in order to fulfill the needs of the company and shareholder happiness. After reviewing both companies JCPenny’s and J.M. Smuckers the following has been realized. Both organizations share similarities; have been in operation since the early 1900s and have good strong family based values. Where JCPenny’s is a retail giant, J.M. Smuckers sells everything from peanut butter to packaged coffee both are leaders in their respective markets. Each company has longevity enough to prove they are both stable and consistent partners for a strong merger. A review of each organization’s financial reports shows that balance sheets and statement of cash flow are used in each case. However, J.M. Smuckers in addition to those used income sheets. The use of J.M. Smuckers income sheets does give our organization a better look into their financial well being. Financial Statement Review 7 Figure 1. Summary of Balance Sheet and Statement of Cash Flow for J.C. Penney Figure 2. Income Statement, Balance Sheet and Statement of Cash Flow for J.M. Smucker Company The J. M. Smucker Company Unaudited Condensed Consolidated Statements of Income Three Months Ended October 31, Six Months Ended October 31, % % Increase Increase (Decrease (Decrease 2010 2009 ) 2010 2009 ) Financial Statement Review 8 (Dollars in thousands, except per share data) Net sales $ 1,278,913 $ 1,278,745 0% $ 2,326,225 $ 2,330,271 (0%) Cost of products sold 772,171 786,495 (2%) 1,401,595 1,431,992 (2%) Cost of products sold restructuring 12,072 n/m 21,525 n/m Gross Profit 494,670 492,250 0% 903,105 898,279 1% Gross margin 38.7% 38.5% 38.8% 38.5% Selling, distribution, and administrativ e expenses 222,821 232,985 (4%) 426,082 434,162 (2%) Amortization 18,501 18,312 1% 36,998 36,689 1% Merger and integration costs 2,773 8,148 (66%) 5,429 24,624 (78%) Other restructuring costs 8,345 n/m 26,449 n/m Other operating expense net 2,194 1,599 37% 2,944 2,764 7% Operating Income 240,036 231,206 4% 405,203 400,040 1% Financial Statement Review 9 Operating margin 18.8% 18.1% 17.4% 17.2% Interest income 572 686 (17%) 1,005 2,057 (51%) Interest expense (18,505) (17,473) 6% (35,044) (36,424) (4%) Other (expense) income net (376) 583 (164%) 317 563 (44%) Income Before Income Taxes 221,727 215,002 3% 371,481 366,236 1% Income taxes 72,001 75,012 (4%) 118,874 128,183 (7%) Net Income $ 149,726 $ 139,990 7% $ 252,607 $ 238,053 6% Net income per common share $ 1.25 $ 1.18 6% $ 2.12 $ 2.00 6% Net income per common share assuming dilution $ 1.25 $ 1.18 6% $ 2.11 $ 2.00 6% Dividends $ 0.40 $ 0.35 14% $ 0.80 $ 0.70 14% declared per Financial Statement Review 10 common share Weighted average shares 119,512,00 118,956,18 119,406,46 118,810,41 outstanding 1 1 0% 5 7 1% Weighted average shares outstanding assuming 119,642,39 119,100,43 119,541,44 118,923,33 dilution 8 0 0% 5 7 1% The J. M. Smucker Company Unaudited Condensed Consolidated Balance Sheets Financial Statement Review 11 October 31, 2010 April 30, 2010 (Dollars in thousands) Assets Current Assets: Cash and cash equivalents $ 487,463 $ 283,570 Trade receivables 415,826 238,867 Inventories 822,614 654,939 Marketable securities 48,086 Other current assets 80,197 46,254 Total Current Assets 1,854,186 1,223,630 Property, Plant, and Equipment, Net 841,095 858,313 Other Noncurrent Assets: Goodwill 2,807,418 2,807,730 Other intangible assets, net 2,989,374 3,026,515 Other noncurrent assets 61,277 58,665 Total Other Noncurrent Assets 5,858,069 5,892,910 $ 8,553,350 $ 7,974,853 Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 194,194 $ 179,509 Financial Statement Review 12 Current portion of longterm debt 10,000 Other current liabilities 282,725 289,388 Total Current Liabilities 476,919 478,897 Noncurrent Liabilities: Longterm debt, net of current portion 1,300,000 900,000 Other noncurrent liabilities 1,272,422 1,269,636 Total Noncurrent Liabilities 2,572,422 2,169,636 Shareholders' Equity 5,504,009 5,326,320 $ 8,553,350 $ 7,974,853 The J. M. Smucker Company Unaudited Condensed Consolidated Statements of Cash Flow Six Months Ended October 31, Financial Statement Review 13 2010 2009 (Dollars in thousands) Operating Activities Net income $ 252,607 $ 238,053 Adjustments to reconcile net income to net cash used for operating activities: Depreciation 56,646 51,148 Amortization 36,998 36,689 Sharebased compensation expense 12,268 13,098 Noncash restructuring charges 26,807 Loss on sale of assets – net 1,027 1,621 Working capital (366,807) (152,797) Net Cash Provided by Operating Activities 19,546 187,812 Investing Activities Additions to property, plant, and equipment (62,073) (89,433) Purchases of marketable securities (57,037) Sale and maturities of marketable securities 9,000 13,519 Other – net 350 (818) Net Cash Used for Investing Activities (109,760) (76,732) Financing Activities Repayments of longterm debt (10,000) (75,000) Financial Statement Review 14 Proceeds from longterm debt 400,000 Quarterly dividends paid (95,333) (82,993) Purchase of treasury shares (5,147) (5,225) Other – net 4,576 1,958 Net Cash Provided by (Used for) Financing Activities 294,096 (161,260) Effect of exchange rate changes 11 3,195 Net increase (decrease) in cash and cash equivalents 203,893 (46,985) Cash and cash equivalents at beginning of period 283,570 456,693 Cash and cash equivalents at end of period $ 487,463 $ 409,708 References: AFLCIO. (2010). Americas Union Movement. Retrieved from http://www.aflcio.com/ Beginners Guide to financial statements (2007). Retrieved December 12, 2010 from http://www.sec.gov/investor/pubs/begfinstmtguide.htm Business Week. (2010). Con Agra Foods. Retrieved from http://ccbn.businessweek.com/highlight.asp?client=bweek Due diligence. (2003). In Capstone Encyclopaedia of Business. Retrieved from http://www.credoreference.com/entry/capstonebus/due_diligence FAQ. (2010). Internet FAQ Archives. Retrieved from http://www.faqs.org/faqs/ Hcnoline.com. (2010). What you need when you need it. Retrieved from http://www.hcnoline.com/ Financial Statement Review 15 Ticker. (2010). A financial voice for the investment community. Retrieved from http://www.ticker.com/ US Securities and Exchange Commission. (2010) Retrieved from http://www.sec.gov/ FAQ. (2010). Internet FAQ Archives. Retrieved from http://www.faqs.org/faqs/ Steve W. Albrecht (2008). Financial Statement an Overview. Accounting Concepts and Applications ch.2. Thomson Learning, Incorporated
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