Respond to at least two of your fellow students’ or instructor posts in a substantive manner. Each response should have a minimum of 100 words and be respectful of others’ opinions and beliefs that differ from your own.
Total of 400 words
Prepare a comparative balance sheet, income statement, and statement of cash flows, and perform a horizontal analysis of the company’s balance sheet, income statement, and statement of cash flows for the most recent 2 years. Identify at least one significant change (increase or decrease) from one year to the next in a balance sheet account, income statement account, and statement of cash flows account.
. Apple Company Horizontal Analysis of the Balance Sheets and Income Statement
sheet $ 000,000 $ 000,000 (%)
Assets 224,748 191,835 17.14
Total Assets 365,725 338,516 8.04
Liabilities 129,525 108,856 18.97
Liabilities 199,664 172,829 15.50
166,061 165,687 0.23
Net Sales 123,857 83,357 48.51
Expenses 14,771 12,426 18.87
Income 29,428 17,710 66.35
Net Income 34,193 21,744 57.19
AAPL's financial statements indicate that the company can create more revenue and raise its profits during this period. However, AAPL took on more liabilities to finance its growth initiatives, which may have impacted its financial position in the long term.
Identify the causes of the change in each of these accounts.
The horizontal analysis shows Apple’s (APPL) balance sheet and income statement changes between December 25, 2021, and September 25, 2021. To start with the balance sheet, there was a slight increase in total current and total assets by 17.14% and 8.04%, respectively. This shows that AAPL was able to earn more revenue in this period, which may increase its assets. There is a significant increase in total current liabilities by 18.97%, possibly due to the increase in expenses or the need to finance other growth initiatives. Total liabilities increased by 15.50%, demonstrates that AAPL could have taken more debt to finance its activities. Subsequently, there is a slight increase of about 0.23% for the total shareholders' equity, which translates that AAPL did not create much-retained earnings or may have repurchased some of its shares.
In the income statement, there is an increase in net sales by 48.51%, showing that AAPL raised its revenue during this period. The operating expenses increased by 18.87%, which may be due to research and/or development or through marketing investments. Thus, operating income increased by 66.35%, showing that AAPL created more income from its normal operations. Finally, net income increased by 57.19%, showing that AAPL generated more profit during this period.
Discuss the implications of each of these account changes, and your assessment of the company based on these changes. Do these changes reflect positively or negatively on the company, and what is your assessment of the outlook for the company?
Apple’s financial statements indicate that the company can create more revenue and raise its profits during this period. However, they took on more liabilities to finance its growth initiatives, which may have impacted its financial position in the long term. Apple is in good financial health with a compelling performance in revenue growth, reasonable expenses, and a low ratio of net interest income expense to income from the operations.
References: Porter, G., & Norton, C. (2018). Using financial accounting information: The alternative to debits and credits (10th ed.). Retrieved from https://www.cengage.comLinks to an external site. https://investor.apple.com/investor-relations/default.aspxLinks to an external site.
Victoria’s post One significant change in the horizontal analysis of Medtronic for fiscal years 2020 and 2021 on the balance sheet was that the current debt obligations were reduced by nearly 100%. The current debt obligations in 2020 were $2,776M and dropped to only $11M the following year. According to the annual report, this is due to two-year senior notes hitting their expiration. As a result, the implications are that the current liabilities were lower in 2021 than in 2020, giving them a stronger current ratio. This reflects positively on the business and represents they are able to pay off their obligations and meet commitments.
On the income statement, the biggest change was an increase in operating expense, increasing by a whopping 344% YoY. According to the annual report, this is, in large, due to currency exchange rate contracts triggering higher expenses. As Medtronic is an international business, avoiding issues like these is a troublesome matter, and other businesses were in the same position being forced to take a loss due to unfavorable exchange rates in the global economic realm. This expense decreased operating profit, and thus the net income of the business, which was lower in 2021 than in 2020. Because
this is due to conditions outside of Medtronic's control, the business still would be a desirable investment.
Similar to the balance sheet, the largest changes between 2020 and 2021 for the statement of cash flows was change in current debt obligations and more owed for repayments from short-term borrowings under financing activities. The debt obligations can be a sign of investment into future growth of the business, but these numbers do affect the overall cash available at the end of 2021, which was less than that of 2020. This can signal to lenders that Medtronic may be a risky investment, which will hurt the business in the long run.
Medtronic. (2021). Annual Report. Retrieved from https://www.annualreports.com/Company/medtronic-incLinks to an external site.
Porter, G., & Norton, C. (2018). Using financial accounting information: The alternative to debits and credits (10th ed.). Retrieved from https://www.cengage.com
My analysis will continue for Gamestop, Inc. (NYSE: GME) for the first segment, and I will use Best Buy as a comparison (NYSE: BBY).
Below are the common-size balance sheet, income statement, and statement of cash flows for Gamestop, followed by the same for Best Buy.
Balance Sheet – Gamestop
Income Statement – Gamestop
Statement of Cash Flows – Gamestop
Balance Sheet – Best Buy
Income Statement – Best Buy
Statement of Cash Flows – Best Buy
Benefits of Common-Size Financial Statements
Common-size statements are beneficial for comparing different time series as well as different companies. For time series, because the changing value of the dollar is somewhat negated or minimized, you can remove that variable and compare what portion of a total category each financial line item is rolling up as. When considering different companies, as in this example, it allows you to compare companies of different sizes more easily by using ratios as opposed to only having raw dollar figures that may give a different perception (Porter & Norton, 2018).
Taking a look at cash and current assets across both sets of vertical analyses, it is interesting to note that both companies comparatively have kept a similar percentage of cash on hand in the range of 14% to 29%, although Best Buy carries a significantly higher valued inventory that brings a heavy percentage to its current asset line compared to Gamestop, which is to be expected due to the specialty of the Gamestop market of items.
Regarding the income statements, the ~10% difference between Gamestop and Best Buy really makes the difference in profitability for the selling, general, and administrative financial line. This would be the difference for profitability for Gamestop, where Best Buy continues to hover around the 17% mark year over year.
Lastly, taking a look at the cash flows, Best Buy has made significant efforts to pay down debt, in that the line item is almost a 60% impact relative to the total cash flows for the periods in question, where Gamestop is impacting cash flows of about 23%.
Financial Conditions for Gamestop & Best Buy
This comparison shows me that Best Buy is performing better from a percentage of operating costs perspective, able to maintain enough sales to justify operating expenses, unlike Gamestop. Gamestop’s financial condition using this analysis is not necessarily new news after the discussions over the past several weeks, but it does provide a framework for added doubt that unless Gamestop can cut operating costs by 33%, it will be difficult to turn a profit in the near future. Additionally, it shows that Best Buy is performing at a better level and is working to pay down debts at a higher rate to put the company in a better financial position. Recent trading behavior regarding options trading echos this sentiment, that Best Buy is making strides towards a more secure financial future where expectation is for Gamestop to continue to decline (Conway, 2010).
Conway, B. (2010, June 16). A tale of two trading arenas for Best Buy, GameStop. The Wall Street Journal Eastern Edition, 0(0). Retrieved from https://library.uagc.edu/index.aspxLinks to an external site. Gamestop (2022). 2021 Annual Report – Investor Relations. Gamestop. Retrieved from https://news.gamestop.com/Links to an external site. Gamestop (2021). 2020 Annual Report – Investor Relations. Gamestop. Retrieved from https://news.gamestop.com/Links to an external site. Porter, G., & Norton, C. (2018). Using financial accounting information: The alternative to debits and credits (10th ed.). Retrieved from https://www.cengage.comLinks to an external site.
Common-Size Balance Sheet
Item 2022 Common-size 2021 Common-size
Cash and cash
equivalents 9,519 10.26 9,684 10.26
investments 1,043 1.12 1,242 1.32
securities 1,069 1.15 1,699 1.80
Trade AR 3,487 3.76 3,512 3.72
Inventories 4,233 4.56 3,414 3.62
expenses 3,240 3.49 2,994 3.17
investments 18,264 19.69 17,598 18.65
investments 501 0.54 818 0.87
current assets 6,189 6.67 6,731 7.13
income tax 1,746 1.88 2,129 2.26
PPE net 9,841 10.61 9,920 10.51
Trademarks 14,214 15.32 14,465 15.33
Goodwill 18,782 20.24 19,363 20.52
635 0.68 785 0.83
Total assets 92,763 100.00 94,354 100.00
Common-Size Income Statement
Item 2022 Common-size 2021 Common-size
revenues 43,004 100.00 38,655 100.00
Cost of goods
sold 18,000 41.86 15,357 39.73
Gross profit 25,004 58.14 23,298 60.27
Operating income 10,909 25.36 10,308 26.67
Interest income 449 1.04 276 0.71
income taxes 11,686 27.17 12,425 32.14
income 9,571 22.26 9,804 25.36
9,542 22.19 9,771 25.28
One of the major competitors to Coca-Cola is PepsiCo. Its common-size statements are as follows:
Item Common-size 2022 Common-size 2021
Cash and cash equivalents 5.37 6.06
Short-term investments 0.43 0.42
Restricted cash 0.00 0.00
Accounts receivable 11.02 9.40
Inventories 5.66 4.71
Prepaid expenses 0.87 1.06
Assets held for sale 0.00 1.94
Current assets 23.36 23.58
Intangible assets 36.65 40.10
Other assets 5.74 4.85
Non-current assets 76.64 76.42
Common-size income statement
Item Common-size 2022 Common-size 2021
Net revenue 100.00 100.00
Cost of sales -46.97 -46.65
Gross profit 53.03 53.35
Operating profit 13.33 14.04
Net interest expenses -1.09 -2.94
Income before income taxes 12.39 12.36
Net income 10.39 9.66
Net income attributable to the
company 10.31 9.59
Net income available for
shareholders 10.31 9.59
Common-sized financial statements are a convenient way to compare financial statement items because the items of the statements are displayed as a percentage of a given common figure. This approach creates a common size for the financial statements thereby making it simplified to analyze a company within a specified period or industry.
In the balance sheet of Coca-Cola, an item like inventories increased from 3.62 in 2021 to 4.56 in 2022. However, the competitor company PepsiCo, the inventories increased from 4.71 to 5.66. Likewise, in the income statement, an item like gross profit declined from 60.27 in 2021 to 58.14 in 2022. However, for PepsiCo, the gross profit declined from 53.35 to 53.03.
The comparison shows that Coca-Cola’s current financial performance is not very strong compared to that of PepsiCo. However, the gross profit for Coca-Cola was better both for the current year and the previous year. The results clearly show that PepsiCo is the major competitor of Coca-Cola in the industry and competes with it in various critical aspects.