Week-5 assignment
Evaluating Financial Statement Quality
Prior to beginning work on this assignment, review Chapter 17 of the textbook, and read the articles The Search for Suspect Accounting and Earnings Quality: Evidence From the Field (Links to an external site.).
Evaluate the quality of a company’s income statement, balance sheet, and cash flow statement. Continue using the two companies from your Week 4 assignment and Week 5 Discussion 2. Use the 10-K for each of the last three years for both companies.
In your paper, address the following issues:
- Determine whether each company provides financial reports that are generally accepted accounting principles (GAAP)-compliant and decision useful.
- Characterize the financial reports with reference to the quality spectrum of financial reports.
- Determine whether the results (earnings) are of high quality for each company. Justify your determination with the following:
- Determine analyst adjustments to earnings, if any.
- Analyze the adjusted earnings relative to the stated earnings over the three-year period.
- Compare reported earnings and adjusted earnings to operating cash flow over the three-year period.
- Prepare a ratio analysis of the financial performance over the past three years for each company. Include these items in this analysis:
- Revenue growth per year
- Receivables growth per year
- Receivables as a percentage of revenues
- Days’ sales outstanding
- Accounts receivable turnover
- Allowance for doubtful debts (percentage change year over year)
- Inventory turnover
- Current ratio
- Gross margin
- Operating margin
- Net income margin
- Adjusted operating margin
- Review and comment on the following policies for each company to justify your determination:
- Amounts and timing of revenue recognition
- Policies on customer returns
- Recognition of expenses
- Amount, timing, and restatement (if any) of nonrecurring expenses
- Depreciation policies
- Goodwill amounts and potential for future impairment of goodwill
- Description and treatment of contingent liabilities
- Balance sheet classifications of long and short term assets and liabilities, and any changes to these classifications.
- Balance sheet reserve and allowance policies
- Treatment of balance sheet financing such as leases
- Determine if there are any 8-K and NT filings for each company within the past year.
- Determine if they provide meaningful information with regards to the quality of the financial reports.
- Determine analyst adjustments to earnings, if any.
The Evaluating Financial Statement Quality Paper
- Must be three to five double-spaced pages in length (not including title and references pages) and formatted according to APA style as outlined in the APA Style (Links to an external site.) resource. Within these three to five pages, provide data tables and calculations. These tables and calculations should be approximately 40% to 50% of the total work product.
- Must include a separate title page with the following:
- Title of paper
- Student’s name
- Course name and number
- Instructor’s name
- Date submitted
