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| Exercise 6.1 | Anatomy of an Annual Report |
IBM's Investment Guides provide an introduction on how to read and interpret the financial statements in a company's annual report. After reading the "Anatomy" section, you should be able to answer the following questions.
http://www.ibm.com/investor/tools/financials.phtml
http://www.ibm.com/investor/help/reports/anatomy.wssQ. In the United States, what are some "optional" elements found in an annual report? What are some elements found in an annual report that are required to be included by the Securities and Exchange Commission (SEC)?
| Exercise 6.2 | Ratio Analysis |
Make use of one or more of the following web sites to find financial information covering the last three years on two competing, publicly traded corporations (e.g., Wal-Mart and K-Mart): Financials.com, SEC EDGAR Database, and/or Company-specific web site(s). For each firm, prepare a table similar to Table 6-3 in the text -- but, don't worry about showing any industry ratios. Each of your tables should, therefore, show three-year's worth of firm-specific ratios grouped by categories.
http://www.financials.com/index.cfm
http://www.sec.gov/edgarhp.htmQ. Based on your analysis of levels and trends in ratios, what conclusions can you draw about each firm's liquidity, leverage, coverage, activity, and profitability? Which firm may be doing better? Why?
| Exercise 6.3 | Common-Size and Index Analysis |
Standardization of balance sheet and income statement items as percentages of totals and as indexes to a base year often gives us insights additional to those obtained from the analysis of financial ratios.
Make use of one or more of the following web sites to find balance sheets and income statements covering the last three years on one of the two competing, publicly traded corporations that you studied in Exercise 6.2: Financials.com, SEC EDGAR Database, and/or Company-specific web site(s). For your selected firm, prepare tables similar to Tables 6-4, 6-5, and 6-6 in the text. Each of your tables should, therefore, show three-year's worth of firm-specific balance sheet or income statement data alongside either common-size or indexed data covering the same three-year period.
http://www.financials.com/index.cfm
http://www.sec.gov/edgarhp.htmQ. Based on your analysis of levels and trends in common-size and indexed data, what additional conclusions can you draw about your firm's liquidity, leverage, coverage, activity, and profitability? Were you able to either confirm or cast doubt on any of your earlier conclusions made in Exercise 6.2?
| Exercise 6.4 | Predictive Power of Financial Ratios |
Financial ratios are used to predict business failure. Edward Altman developed a model to predict bankruptcy, using various financial ratios. He found that five financial ratios could discriminate effectively between bankrupt and nonbankrupt companies, beginning up to five years before the bankruptcy event.
Visit The Insolvency Predictor Z-Score Page to learn more about Altman's bankruptcy prediction (Z-score) model. Use the worksheet found on the "Z-Score" web site to figure out the Z-Score for the Aldine Manufacturing Company as of 3/31/X2. A fiscal-year ending balance sheet (Table 6-1) and income statement (Table 6-2) can be found in the textbook. (TIPS: In this model, "working capital" means current assets minus current liabilities, "market value of equity" refers to common stock plus preferred stock (if any) and assume that Aldine's "market value of equity" equals $2.1 million as 3/31/X2, and "total liabilities" means current liabilities plus long-term debt at book value.)
http://www.creditguru.com/CalcAltZ.shtmQ. What is Aldine's "Z-Score"? Based on Aldine's "Z-Score" would you classify the company as "financially sound," "potentially in trouble," or "heading toward bankruptcy"?