Question

Procter & Gamble, explore their website to answer each of the below questions. Your starting point should be to locate the financial statements for your chosen company which will be included in their "Annual Report" which is usually found in the Investor Relations section of their website. Form 10-K is also available in the Securities Exchange Commission (“SEC”) company filings database by entering the company name in the indicated field. Use the companies financial data to support your explanations.

1. Analyze the company's income statement for the past three years. Identify the trend (i.e. increase or decrease) demonstrated by total revenue, total expense, and net income (or loss) for this time period. Also identify any major increases or decreases within the revenue and expense sections (if any). Cite numbers or percentages to support your response.
2. Analyze the company's balance sheet for the past two years. Identify the trend (i.e. increase or decrease) demonstrated by total assets, total liabilities, and total owners’ equity for this time period. Also identify any major increases or decreases within the asset and liability sections (if any). Cite numbers or percentages to support your response.
3. Based on your analysis of the income statement and balance sheet, discuss any areas of concern. Do you believe the company is currently in a strong financial position or heading into trouble? Support your reasoning.
4. Describe how the financial statements that you evaluated impact internal and external stakeholders. For example, how would this information be used in your company by its management and executives? Also, who on the “outside” of the company would be interested in this information and how would it impact them?
5. Assume that the Controller at your selected company told you that the Profit Margin increased from 15% last year to 17% this year. Describe what the Profit Margin is and how it is determined. Indicate if the company's results are good news or bad news. If the Controller would like to target a 20% Profit Margin for next year, what needs to occur in terms of the company's performance?
6. During the same conversation with the Controller in the previous question, you learned that the Current Ratio increased from 3.0x last year to 3.5x this year. Describe what the Current Ratio is and how it is determined. Indicate if the company's results are good news or bad news. If the industry standard for a similar company is 4.0x, what changes would your company need to make in order to achieve this level for it's Current Ratio as a target for next year?

Answer 1

Procter & Gamble ( Amount in million)
Answer(i) Analysis of income statement for past three years:-

On FY 2017 Total revenue of company is $65058

Total expense of company is $49732

Net income of company is $15411

On F.Y 2018 Total revenue of company is $66832

Total expense of company is $57082

Net income of company is $9861

On F.Y 2019 Total revenue of company is $67684

Total expense of company is $63787

Net income of company is $3966

** Analysis:- (1) Revenue to be recognised as per Ind AS 115 or Ind AS 18.

Total revenue of company is increasing from 2017. In percentage terms change in revenue
From year 2017 to year 2018 is:- 2.73%
From year 2018 to year 2019 is:- 1.275%
which is quite increasing. However % is decreasing while compared to previous year % and this is a concern for company but not major concern. Company can increase its revenue by increasing quality of product or by doing some advertisemsnt so that people come to know much more about their product.

(2) Total expense of the company is continuously increasing from year 2017.

% increase from 2017 to 2019 is 28.26% which is major as compared to change in % of revenue. Main reason for this is impairment charges which were not there in year 2017 & 2018 but is there in 2019. Impairment method if adopted properly as per Ind AS 38, then it might reduce expenses.

(3) Net income is reducing from past three years due to increase in expenses.

Analysis of balance sheet from two years:-

Total assets of the company on F.Y 2019:- $115095

Total liability on F.Y 2019 :- $67516

Total shareholder equity on F.Y 2019:- $47579

Total assets of the company on F.Y 2018:- $118310

Total liability on F.Y 2018:- $65427

Total shareholder equity on F.Y 2019:- $52883

** Total assets of the company are decreasing from last year due to impairment of goodwill, Sale of investment available for sale, Reduction of inventory may be closing stock was less as compared to previous year.

Total liabilities of the company are Increasing due to Increase in amount payable, Deferred income taxes.

Total shareholder equity are decreasing from last year

Answer(ii) Area of concern:- Main area of concern is of expenses. Proper attention should be on this. Expenses should be made only if verified by higher authority. No teeming and lading fraud should be there is company. Company's Credit card should not be used for personal expenses at all.

The position of company is still strong because company balance sheet retained earning is showing $94918. Though it is not increasing still it is not decreasing too much and therefore company is still capable of paying its liabilities easily. Moreover company's assets are not in bad position too.

Impact of financial statements on internal and external stakeholders:-

Internal Stakeholders includes employees, manager, owner.

External stakeholder includes customer, suppliers, society, government, creditors, shareholder.

If financial statement are showing profit it creates a motivation for employees i.e internal stakeholder to work better so that they receive bonus and increment in their salary.

For external stakeholder like creditors which include bank etc.. financial statement is the only projection to see whether company is liable to pay if loan granted to them or not.

Shareholder is also covers under major external stakeholder who buy equity of company who is doing great in market. More profit will lead them to higher dividend.

So financial statement is the only basis for stakeholders.

(iii) To increase profit margin from 17% to 20% company need to develop some new policies towards sale of product, more attention should be given to customers i. e to attract new customers towards their product. Customer gets attracted more when quality of the product is as per their specification.

(iv) Current ratio can be determined as:-

Current assets/ Current liabilities

where Current assets include debtors, cash, inventory etc

Current liability include creditors, bank overdraft etc

At present company's current ratio is 3.5x as compared to last year which is 3.0x.

More current assets or less current liability will increase the current ratio.
To increase the ratio to 4.0x as per industry standard following can be done.

1. Pay off the creditors or bank overdraft as it will reduce current liability

2. Increase the credit sale, closing stock, cash balance, bank balance as it will increase current assets.