Oak Industries, Inc is a manufacturer of radio and cable TVequipment. It also operates subscription TV systems. At one timeOak had a military contract, the loss of which was not disclosed inthe financial statements. The government, subject to a customs dutyaudit, is claiming $4 million due it. Oak officials have had atarget earnings per share amount of $.25 per share.
The financial statements, without footnotes, are included in thefollowing two pages. Using the financial information available andthe information above, answer the following questions:
1) Prepare a vertical analysis for both the balance sheet andthe statement of income
2) Prepare a horizontal analysis for both the balance sheet andthe statement of income
3) What ratios might be of some use in analyzing these financialstatements?
4) Using the ratios identified in #3 above, what trends appearto be out of line?
5) Other than failure to disclose the loss of the governmentcontract, can you identify any potential fraudulent, misleading oromitted information from your analysis in number 1-4 above?
6) If your answer to #5 is yes, can you quantify the amount ofthe potential misstatement?
Oak Industries, Inc
Unaudited consolidated Financial Statements
(000âs Omitted)
Balance Sheet
Balance Sheet
12/31/X1
12/31/X2
ASSETS
Cash
$10,304
$12,683
Marketable Securities
66,676
33,235
Accounts Receivable
104,953
131,017
Inventories
106,569
127,305
Prepaid Income Taxes
10,762
24,461
Total Current Assets
299,264
328,701
Fixed Assets
248,991
277,493
Accumulated Depreciation
(70,640)
(99,789)
Notes Receivable
10,983
13,368
Intangible Assets (net)
78,918
57,946
Investments
27,323
34,164
Other Assets
14,480
24,297
310,055
307,479
Total Assets Liabilities & equity
$609,319
$636,180
Notes Payable
$70,758
$8,846
Accounts Payable
35,053
31,430
Accrued Liabilities
47,765
54,857
Current Portion LTD
8,889
5,391
Subscriber Deposits
17,502
15,378
Total Current Liabilities
179,967
115,902
Long-Term Debt
141,744
238,417
Other L/T Liabilities
25,325
27,746
167,069
266,163
Common Stock
16.363
16,402
Preferred Stock
72
54
Capital Surplus
158,890
159,281
Retained Earnings
89,761
89,932
Currency Adjustments
(2,757)
(11,521)
Treasury Stock
(46)
(33)
Total Liabilities & Equity
$609,319
$636,180
Statement of Income
Statement of Income
12/31/X1
12/31/X2
Net Sales
$507,119
$545,720
Cost of Goods Sold
338,682
410,209
Gross Margin
168,437
135,511
General Expenses
107,707
125,982
Operation Income
60,730
9,529
Other Income
15,944
10,659
Interest Expense
25,430
30,170
Minority Interests
8,986
3,075
Income Taxes (Benefit)
11,908
(17,160)
(30,380)
(5,426)
Net Income
$30,350
$4,103
Earnings Per Share
$2.01
$0.25
Oak Industries, Inc is a manufacturer of radio and cable TVequipment. It also operates subscription TV systems. At one timeOak had a military contract, the loss of which was not disclosed inthe financial statements. The government, subject to a customs dutyaudit, is claiming $4 million due it. Oak officials have had atarget earnings per share amount of $.25 per share.
The financial statements, without footnotes, are included in thefollowing two pages. Using the financial information available andthe information above, answer the following questions:
1) Prepare a vertical analysis for both the balance sheet andthe statement of income
2) Prepare a horizontal analysis for both the balance sheet andthe statement of income
3) What ratios might be of some use in analyzing these financialstatements?
4) Using the ratios identified in #3 above, what trends appearto be out of line?
5) Other than failure to disclose the loss of the governmentcontract, can you identify any potential fraudulent, misleading oromitted information from your analysis in number 1-4 above?
6) If your answer to #5 is yes, can you quantify the amount ofthe potential misstatement?
Oak Industries, Inc
Unaudited consolidated Financial Statements
(000âs Omitted)
Balance Sheet
Balance Sheet | 12/31/X1 | 12/31/X2 |
ASSETS | ||
Cash | $10,304 | $12,683 |
Marketable Securities | 66,676 | 33,235 |
Accounts Receivable | 104,953 | 131,017 |
Inventories | 106,569 | 127,305 |
Prepaid Income Taxes | 10,762 | 24,461 |
Total Current Assets | 299,264 | 328,701 |
Fixed Assets | 248,991 | 277,493 |
Accumulated Depreciation | (70,640) | (99,789) |
Notes Receivable | 10,983 | 13,368 |
Intangible Assets (net) | 78,918 | 57,946 |
Investments | 27,323 | 34,164 |
Other Assets | 14,480 | 24,297 |
310,055 | 307,479 | |
Total Assets Liabilities & equity | $609,319 | $636,180 |
Notes Payable | $70,758 | $8,846 |
Accounts Payable | 35,053 | 31,430 |
Accrued Liabilities | 47,765 | 54,857 |
Current Portion LTD | 8,889 | 5,391 |
Subscriber Deposits | 17,502 | 15,378 |
Total Current Liabilities | 179,967 | 115,902 |
Long-Term Debt | 141,744 | 238,417 |
Other L/T Liabilities | 25,325 | 27,746 |
167,069 | 266,163 | |
Common Stock | 16.363 | 16,402 |
Preferred Stock | 72 | 54 |
Capital Surplus | 158,890 | 159,281 |
Retained Earnings | 89,761 | 89,932 |
Currency Adjustments | (2,757) | (11,521) |
Treasury Stock | (46) | (33) |
Total Liabilities & Equity | $609,319 | $636,180 |
Statement of Income
Statement of Income | 12/31/X1 | 12/31/X2 |
Net Sales | $507,119 | $545,720 |
Cost of Goods Sold | 338,682 | 410,209 |
Gross Margin | 168,437 | 135,511 |
General Expenses | 107,707 | 125,982 |
Operation Income | 60,730 | 9,529 |
Other Income | 15,944 | 10,659 |
Interest Expense | 25,430 | 30,170 |
Minority Interests | 8,986 | 3,075 |
Income Taxes (Benefit) | 11,908 | (17,160) |
(30,380) | (5,426) | |
Net Income | $30,350 | $4,103 |
Earnings Per Share | $2.01 | $0.25 |
Related questions
1. Apply to actual companies the basic knowledge and analytical techniques learned from our course.
2. Prepare common-size financial statements, comparative financial statements, and various profitability and risk ratios.
3. Compare the calculated results with competitors and across different years.
4. Summarize the analyses and make investment recommendations.
You will be analyzing the following firms:
Williams-Sonoma, Inc.
Pier 1 Imports, Inc.
For these firms, download the most recent annual report (10-K report) to begin your work. In 10-K reports, you can find companiesâ basic information, financial statements, footnotes to the financials, and the management discussions and analyses. Please download the 10-K reports from the following web links:
10-K reports (fiscal year 2016) for Williams-Sonoma, Inc.
https://www.sec.gov/Archives/edgar/data/719955/000119312517104341/d265187d10k.htm
10-K reports (fiscal year 2015) for Williams-Sonoma, Inc.
https://www.sec.gov/Archives/edgar/data/719955/000119312516525847/d120289d10k.htm
10-K reports (fiscal year 2014) for Williams-Sonoma, Inc.
https://www.sec.gov/Archives/edgar/data/719955/000119312515118009/d851953d10k.htm#tx851953_13
10-K reports (fiscal year 2016) for Pier 1 Imports, Inc.
https://www.sec.gov/Archives/edgar/data/278130/000119312517136345/d343458d10k.htm
10-K reports (fiscal year 2015) for Pier 1 Imports, Inc.
https://www.sec.gov/Archives/edgar/data/278130/000119312516556025/d133529d10k.htm
10-K reports (fiscal year 2014) for Pier 1 Imports, Inc.
https://www.sec.gov/Archives/edgar/data/278130/000119312515153179/d881010d10k.htm#toc881010_13
For your convenience, I also provided the balance sheet and income statement of each company for the most recent years at the end (page 5-8; Table 1-4). Please use them to prepare common-size financial statements and comparative financial statements.
Guidance
The required tasks are detailed below:
(1) Prepare common-size balance sheets and income statements for both companies. Note: Compute for the most recent THREE years.
(2) Prepare comparative analysis (i.e., change of percentage analysis) on income statement and balance sheet for both companies. You should compute for the most recent THREE years.
(3) Prepare ratio analyses (for the same THREE year time period) for both companies. At least, you should include the following ratios in your computations: (1) current ratio, (2) acid-test ratio, (3) receivables turnover, (4) inventory turnover, (5) asset turnover, (6) profit margin on sales, (7) rate of return on assets, (8) rate of return on common stock equity, (9) earnings per share, (10) payout ratio, (11) debt to total assets ratio, (12) times interest earned, (13) cash debt coverage ratio, and (14) book value per share.
(4) Comment on the analytical results of the two companies. Your comments should concentrate on the trends across the companies. In addition to contrasting the ratios between the companies, you should interpret the numbers and make suggestions as to why the ratio of one company might be higher/lower than the other.
(5) Write a conclusive summary on the firms you have studied. Based upon your conclusions, recommend the better performing firm for potential investment. Your conclusions should be based upon, and specifically reference, the analyses prepared in this report.
(6) Read sample project to get some ideas.
Report Format Requirements:
A. Report body requirements:
Cover page. List the title of the project, your names, and semester/year.
Abstract or Executive Summary. This is a separate page. It should cover the purpose of the project, the major findings, and the conclusions/recommendations, in summary form.
Table of Contents.
Main body. Use the following sequence for report content:
Introduction to the two companies and to the purpose of the report
Analytical section. This should include all your numerical analyses. This is where you will discuss the results of, comments on, and conclusions about the vertical and horizontal common-size statements, comparative analysis (i.e., change of percentage analysis), and the ratio analyses for both companies.
Comparisons of companies and all other analysis (observations and/or interpretations). (You may combine b and c if you wish, as long as both are well covered.)
Conclusions and recommendation for investment.
References. List all major reference sources.
Appendices. Include tables and graphs of your numerical analyses. For reference convenience, assign a title to each separate item, such as Table 1, Exhibit 1, etc.
B. Typesetting requirements:
Use size 12 font. Times New Roman is preferred.
Double space between lines.
Number pages in accordance with the APA style guide.
One inch on all sides.
Do not right justify text. Use left justify.
Minimum length: 8 pages. (Note: You can easily meet the minimum length requirement since you will have a lot of tables in the paper.)
The submitted work should be in ONE file with a word or pdf format. An Excel spreadsheet file is NOT acceptable.
Plagiarism
Plagiarism will not be tolerated. Evidence of plagiarism will result in a grade of âFâ to the course and be subject to appropriate disciplines.
NOTES:
A portion of your grade will be assessed based on the overall report quality, clarity, format, and cohesiveness.
A FREE RIDER in the group will not be tolerated. However, to report an alleged free rider, you should send me a formal written complaint. You should carefully manage your group over the semester to ensure that no teammate will take the chance of turning into a free rider. Try to contact/manage your teammates frequently and inform me if any member is not willing to participate the group work so we can address this issue ASAP. A free rider will receive his/her group project grades solely based on what he/she has contributed to the projects. If there is a free-rider in your group or a member drops the class, the rest of the group members are still expected to submit a COMPLETE paper.
Again, the balance sheet and income statements are provided at the end. Please use them to prepare common-size and comparative financial statements.
Table 1. Williams-Sonoma, Inc ----Balance Sheet
| Williams-Sonoma, Inc. | ||||
| BALANCE SHEET | ||||
| Fiscal Years 2016, 2015, 2014, 2013 | ||||
| (In thousands) | FY 2016 | FY 2015 | FY 2014 | FY 2013 |
| ASSETS | ||||
| Current assets | ||||
| Cash and cash equivalents | $ 213,713 | $ 193,647 | $ 222,927 | 330121 |
| Restricted cash | â | â | â | 14289 |
| Accounts receivable, net | 88,803 | 79,304 | 67,465 | 60,330 |
| Merchandise inventories, net | 977,505 | 978,138 | 887,701 | 813,160 |
| Prepaid catalog expenses | 23,625 | 28,919 | 33,942 | 33,556 |
| Prepaid expenses | 52,882 | 44,654 | 36,265 | 35,309 |
| Deferred income taxes, net | â | â | 130,618 | 121,486 |
| Other assets | 10,652 | 11,438 | 13,005 | 10,852 |
| Total current assets | 1,367,180 | 1,336,100 | 1,391,923 | 1,419,103 |
| Property and equipment, net | 923,283 | 886,813 | 883,012 | 849,293 |
| Deferred income taxes, net | 135,238 | 141,784 | 4,265 | 13,824 |
| Other assets, net | 51,178 | 52,730 | 51,077 | 54,514 |
| Total assets | $ 2,476,879 | $ 2,417,427 | $ 2,330,277 | 2,336,734 |
| LIABILITIES AND STOCKHOLDERSâ EQUITY | ||||
| Current liabilities | ||||
| Accounts payable | $ 453,710 | $ 447,412 | $ 397,037 | 404791 |
| Accrued salaries, benefits and other liabilities | 130,187 | 127,122 | 136,012 | 138,181 |
| Customer deposits | 294,276 | 296,827 | 261,679 | 228,193 |
| Income taxes payable | 23,245 | 67,052 | 32,488 | 49,365 |
| Current portion of long-term debt | â | â | 1,968 | 1,785 |
| Other liabilities | 59,838 | 58,014 | 46,764 | 38,781 |
| Total current liabilities | 961,256 | 996,427 | 875,948 | 861,096 |
| Deferred rent and lease incentives | 196,188 | 173,061 | 166,925 | 157,856 |
| Long-term debt | 1,968 | |||
| Other long-term obligations | 71,215 | 49,713 | 62,698 | 59,812 |
| Total liabilities | 1,228,659 | 1,219,201 | 1,105,571 | 1,080,732 |
| Stockholdersâ equity | ||||
| Preferred stock: $.01 par value; 7,500 shares authorized; none issued | â | â | â | 0 |
| Common stock: $.01 par value; 253,125 shares authorized; | ||||
| 87,325 and 89,563 shares issued and outstanding at | 873 | 896 | 919 | 941 |
| January 29, 2017 and January 31, 2016, respectively | ||||
| Additional paid-in capital | 556,928 | 541,307 | 527,261 | 522,595 |
| Retained earnings | 701,702 | 668,545 | 701,214 | 729,043 |
| Accumulated other comprehensive loss | (9,903) | (10,616) | (2,548) | 6524 |
| Treasury stock â at cost: 20 and 29 shares as of January 29, 2017 and January 31, 2016, respectively | (1,380) | (1,906) | (2,140) | (3,101) |
| Total stockholdersâ equity | 1,248,220 | 1,198,226 | 1,224,706 | 1,256,002 |
| Total liabilities and stockholdersâ equity | $ 2,476,879 | $ 2,417,427 | $ 2,330,277 | 2,336,734 |
Table 2. Williams-Sonoma, Inc --- Statement of Income
| Williams-Sonoma, Inc. | ||||
| STATEMENT OF INCOME | ||||
| Fiscal Years 2016, 2015, 2014,2013 | ||||
| (In thousands) | FY 2016 | FY 2015 | FY 2014 | FY 2013 |
| E-commerce net revenues | $ 2,633,602 | $ 2,522,580 | $ 2,370,694 | $ 2,115,022 |
| Retail net revenues | 2,450,210 | 2,453,510 | 2,328,025 | 2,272,867 |
| Net revenues | 5,083,812 | 4,976,090 | 4,698,719 | 4,387,889 |
| Cost of goods sold | 3,200,502 | 3,131,876 | 2,898,215 | 2,683,673 |
| Gross profit | 1,883,310 | 1,844,214 | 1,800,504 | 1,704,216 |
| Selling, general and administrative expenses | 1,410,711 | 1,355,580 | 1,298,239 | 1,252,118 |
| Operating income | 472,599 | 488,634 | 502,265 | 452,098 |
| Interest (income) expense, net | 688 | 627 | 62 | (584) |
| Earnings before income taxes | 471,911 | 488,007 | 502,203 | 452,682 |
| Income taxes | 166,524 | 177,939 | 193,349 | 173,780 |
| Net earnings | $ 305,387 | $ 310,068 | $ 308,854 | $ 278,902 |
