Description

This assignment requires you to thoroughly analyze a particular company’s accounting profile.  It will also require you to prepare pro forma financial statements by altering the assumptions originally used by the company.  You must submit a written report that is well formatted, contains detailed calculations and is properly referenced.

The specific steps are as follows:

1. Choose a public company (not a financial institution or utility). The company must have issued bonds and have operating leases. Confirm your choice with your professor.  Obtain a copy of the most recent annual report or SEC filing that contains a complete set of financial statements and notes.
2. Prepare an analysis of the company’s accounting choices as described in the accounting policies note. (Do not copy and paste from the financial statements into your report, you should only submit original work.)  Highlight the areas in which the company had a choice of accounting method and comment upon whether you think the choice is appropriate, given your company’s industry.  Explain how each choice affects the three primary financial statements (the balance sheet, income statement and statement of cash flows).  For example, is the choice one that would cause assets to be greater than if the company made an alternative choice? This summary should be about five pages long.
3. For each of the following prepare a table showing your calculations and provide a written explanation of your analysis and methodology. Using the accounting equation framework, show the calculations for how each change affects the primary financial statements.  Then prepare a revised balance sheet and income statement in good form.
4. Identify Bad Debt Expense. If your company disclosed bad debt expense, use that amount.  If your company does not disclose bad debt expense, assume that it is 5% of gross accounts receivables.  In either case, determine the effect on the financial statements of a 50% increase in bad debt expense.
5. If your company used the LIFO method of accounting for inventory, use the required disclosures to compute what would happen if the company had used FIFO instead. If the company used FIFO, make the assumption that the numbers are actually LIFO numbers and that the LIFO reserves at the beginning and end of the year were 30% of the reported inventory numbers.
6. Compute the average useful life of your company’s long-lived assets. Determine the effect if the average useful lives were 40% longer than what the company actually used.
7. Prepare a profile of the company’s debt. How many bonds have been issued?  What are the coupon rates and effective (i.e., yield or market) rates?  Obtain a current market quote of the company’s two most recently issued bonds as of year-end and calculate the effect if the company repurchased those bonds at those prices on that date.  If you cannot determine the carrying value of these bonds, assume that they were issued at par.  Assume that to repurchase these bonds, the company issued bonds with a par value equal to the repurchase cost and that the new bonds carry a coupon rate of 4% with semiannual coupon payments and a 10-year maturity.  Assume the market rate at issuance is 4.5%.
8. Capitalize all operating leases using the market rate of interest from part d.
9. Assume that 60 days prior to the year-end, the company repurchased 500,000 shares of its common shares at the market price on that date. Assume that 30 days prior to the year end, the company declared a 10% stock dividend.
10. Assume the company declares and pays a cash dividend equal to 10% of their net income.
11. Recalculate income tax expense using revised net income and the tax rate reflected on the original income statement and make any necessary accrual.
12. If the revisions that are made put the company in a negative cash position, assume that the company borrows enough cash to produce an ending cash balance of $1,000,000. Assume that the borrowing took place at year end at a 6% interest rate and is to be paid back in six months.
13. Using your new balance sheet and income statement, prepare a revised statement of cash flows.

Grading rubric for this assignment:

Parts a through i are worth 5 points each, 10 each points for the revised balance sheet, income statement and statement of cash flows, 10 points for part 2, and 10 points for the overall paper.