Q1. Select two retailing companies in the same industry and go online to their annual report. Calculate inventory turnover, gross profit percentage, Current Ratio, Debt Ratio, for both and conclude to the class which company you feel is the stronger overall of the two and why.
Apple Corporation and BestBuy Company financial analysis for the period ended 2011(values in millions of dollars). (Bloomberg Businessweek)
Inventory turnover=sales/inventory or cost of sales /average stock
Apple Inc.: cost of goods sold= $64,431/ average stock =$20,613 = 3.126
Best Buy: cost of goods sold= $37,611 / average stock =$7,272 =5.172
Gross profit percentage
Gross profit percentage = sales- cost of sales/sales * 100
Apple Inc.: sales=$108,249- cost of sales=$ 64,431/ sales=$108,249 * 100 = 40.478 %
Best Buy: sales=$50,272 – cost of sales =$37,611 /sales=$ 50,272 * 100 = 25.18 %
Current ratio = current assets/ current liabilities
Apple Inc.: current assets = $44,988/ current liabilities =$39,576 =1.137
Best Buy: current assets = $7,905 / current liabilities = $8,663 =
Debt ratio = total debt/ total assets
Apple Inc.: total debts =$ 8,107 / total assets= $116,371 =0.0697 (Apple
Best Buy: total debts = $ 501 / total assets=$17,849 =0.028 (Bloomberg Businessweek, 48)
Apple is a stronger company because it has a greater gross profit percentage due to its high sales value. In addition, Apple has a better current ratio compared to Best Buy.
Q.2 Discuss three areas where accountants and auditors need to be aware of fraud and suggest ways how they can detect fraud and what they could suggest to management to implement in the form of internal controls to lessen the occurrence of fraud and to be able to detect it early on if it does happen.Fraud is prevalent in any transaction that involves the movement of both cash and goods.
Sales: goods that have been sold are usually prone to fraud by the staff. Fraud occurs when the goods are taken out of the company without the verification of the goods ordered and the goods delivered by the company staff. The goods ordered quantity might differ with the quantity delivered (Millichamp, 18).The staff might issue lesser quantity to the buyer such that the remaining quantity is sold by the staff. The management of a company can prevent fraud in sales by ensuring that issuance of goods is done by a responsible official. Each transaction should be authorized by different responsible officials. Quantity of goods sold should concur with the quantity ordered by the customers (Beasley, 11).
Purchases: Collaboration between staff and the suppliers to commit fraud can result in reduced quantity of goods delivered in contrast with the quantity. Fraud in purchases can be detected by verification of the quantity delivered and the quantity ordered. Auditors can also verify the amounts purchased from inquiring the amounts from the supplier. The company can put internal control on purchases by ensuring that the quantity purchased is equal to the quantity ordered (Millichamp 28).
Cash receipts: Cash receipt is a sensitive part of the accounting section in a company. An accountant may collude with the suppliers or even the management to commit fraud. The accountant might understate the amounts received (Millichamp, 18). An overstatement of the amounts received could show that the management has increased the company’s financial position. Cash should be received by the cashier or accountant only such that he is solely responsible for any disparities in the financial records regarding cash (Beasley, 11).
Q.3 Go to Amazon.com’s financial statements. Why are capital stock and retained earnings shown separately in the shareholders’ equity section of the balance sheet? How much of Amazon’s preferred stock was outstanding in their latest annual report? How can you tell? Examine Amazon’s balance sheet. Which stockholders’ equity account increased the most during its latest year and what caused that increase? Lastly, would it be meaningful to compute Amazon’s return on equity? Explain your answer.
Share capital is divided among the shareholders according to the shares they own. Retained earnings are kept by the company and carried over to the next financial period to cater for unexpected costs or investments that the company might undertake (Libby et al, 49). Amazon had outstanding gains from currency exchange because it carries out business across the globe and deals with many currencies. Additional paid in capital resulted in higher capitalization for the company. The company had $6,999,000,000 billion additional paid in capital from new investors. This increased the demand for the stock driving up the overall price of the stock, thus higher dividends for the shareholders.
Stock holders equity= total assets – total liabilities
Shareholders equity = total assets =$25,278 – total liabilities = $17,521
= $ 7,757
Return on shareholders equity (ROE) = Net income/shareholder’s equity
Net income = $631 / shareholder’s equity =$ 7,757 = 0.081
Computing the company’s return on equity would enable an investor to know the rate return on an investment. It enables an investor in making a judgment on whether or not to make an investment in the said company (Libby et al, 25).
Accounting Coach LLC.Balance sheet. January 1 2012.Web.Accessed on March 1 2012 http://www.accountingcoach.com/online-accounting-course/05Xpg03.html
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Bloomberg Businessweek .Amazon.com Inc (AMZN: NASDAQ GS).Financial statements .January 1 2012.Web.Accessed on March 1 2012 http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=AMZN:US&dataset=balanceSheet&period=A¤cy=native
Bloomberg Businessweek. Best Buy Company Inc. (BBY: New York).Financials. January 3 2012.Web.Accessed on March 1 2012 http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=BBY:US
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Morningstar Financials Apple, Inc.Financial Report.January 8 2012.Web. Accessed on March 1 2012 http://financials.morningstar.com/income-statement/is.html?t=AAPL®ion=USA