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Financial Statements Lester M. Legette Trident University International

ACC501- Accounting for Decision Making Dr. Ralph Wayne Ezelle 06 February 2012

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Having analyzed the financial reports for Abercrombie & Fitch, and Hennes & Mauritz, I have noticed that the two companies report their information very differently. There are some similarities and some differences. In this paper I will compare and contrast the difference between the Balance sheet and the Income statement. I will also be computing different ratios of the two companies, and giving my opinion on what the ratios are telling the analyst. Balance Sheet What components of stockholders equity does each of the companies disclose? Both companies mentioned above disclose their Retained Earnings. Retained earnings are the profit that is generated during a certain period. The company can either decide to pay it out as cash to shareholders, or retain the money and reinvest it in the business. (biginnersinvest n. d.) Do the companies have preferred stock shares outstanding? If so, what special features do these shares contain? Preferred Stock is a class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. (investopedia, n. d.). According to the balance sheets, neither of the two companies has preferred stock shares outstanding, although on the income statement A&F reported basic outstanding shares at 88,061, and diluted at 89,851. Do any of the companies report treasury shares? If so, do the companies disclose the reason for reacquiring the shares?

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This is the portion of shares that a company keeps in their own treasury. Treasury stock may have come from a repurchase or buyback from shareholders; or it may have never been issued to the public in the first place. These shares don't pay dividends, have no voting rights, and should not be included in shares outstanding calculations. (investopedia, n. d.). Abercrombie & Fitch is the only company of the two that reports Treasury Stock; the company does not disclose the reason for reacquiring the shares. Income Statement What are the basic and diluted earnings per share for each company? In 2010 Abercrombie & Fitch reported their Basic earnings per share as $1.71, and their diluted earnings per share as $1.67. In 2010 H&M reported their earnings per share before and after dilution at11.29 SEK. Have the companies reported any discontinued operations for the last year? Neither of the two companies has reported any information from discontinued operations in 2010. Do the companies disclose any stock compensation plans? If so, are they reporting such plans under the fair value or intrinsic value methods? What was the value of compensation expense measured for any outstanding stock option plans? This Statement establishes financial accounting and reporting standards for stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. Examples are

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stock purchase plans, stock options, restricted stock, and stock appreciation rights. (Fasb n. d.). It does not appear that either of the two companies discloses any stock compensation plans. Financial Ratios Profitability ratios: Gross profit margin = Sales Revenue Cost of Goods sold Sales Revenue A&F 3,468,777 1, 256, 596 = 3,468,777 Net profit margin = Net Income Sales Revenue A&F 150,283 = 3,468,777 0.0433 H&M 18,681 = 126,966 0.1471 0.6377 H&M 126,966 -40,214 = 1.3167 126,966

Return on Stockholders Equity = Net income Available to Common Stockholders Stockholders Equity A&F 1,033__ = 0.0005 1,890,784 H&M 25,653 = 0.5807 44,172

Profibility ratios are a class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. (Investopedia, n. d.) In the computations above it appears that H& M is doing better than A&F, but keep in mind that H&M operated over 2,206

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stores in 2010 whereas A&M only operated 1098. The story these ratios are telling analyst is that H & M is doing better of the two companies in the market and he should tell investors to invest in H&M.

Liquidity ratios: Current ratio = Current Assets Current Liabilities A&F 1,433,268 = 2.5646 558,851 H&M 40,932 = 2.9560 13,847 Quick Ratio = Current Assets- Inventory Current Liabilities A&F 1,433,268 310, 645 = 2.0088 558,851 H&M 40,932- 11,487 = 2.1264 13,847 Inventory turnover = Cost of goods sold Inventory A&F 1,256,596 = 0.0040 310,645 H&M -40,214 = 3.5008 11,487

Liquidity ratios are a class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. (investopedia n. d.) According to figures H&M is in a better position to pay off short term debt. H&M Inventory turnover is three times greater than that of A&F. These figures are telling analyst that H&M is moving merchandise three times better than its competition and they have fewer liabilities.

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Leverage Ratios Debt-to-assets = Total Debt Total Assets A&F 71,213 = 0.0252 2,821,866 H&M 3965__ = 0.0669 59,182

A&F Debt-to-equity = Total Debt Total Equity 71,213 = 1,827,917 0.0389

H&M

3965__= 0.0897 44,172

A&F Times-covered ratio = Profit before interest and Tax Total Interest Charges 2,212,181 = 657.99 3,362

H&M

68,269 = 9752.7 -7

Leverage ratios are any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses. When computing ratios I found the Balance sheet more informative only because most of the information that was required to compute was obtained from the balance sheet. I also found the sheet that provided the formulas in the Back ground reading material was very informative. The footnotes on the financial statements provide additional information in a company's financial

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statements. The footnotes provide additional information that is left out of the main reporting documents. This is done mainly for the sake of clarity because these notes can be quite long, if they were included, and they would cloud the data reported in the financial statements. (investopedia n. d.)

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References
Cengage Learning. (n.d.). Business Resources for Students: The Role of Financial Analysis. Retrieved November 15, 2011 from http://college.cengage.com/business/resources/casestudies/students/financial.htm Drake, P. (n.d.). Financial Ratio Analysis. Retrieved November 15, 2011 from http://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf Mongiello, M. (2009). International Financial Reporting. Retrieved from http://bookboon.com/en/business/finance/basics-of-international-financial-reporting Walther, l. (2010). Principles of Accounting. Chapter 16. Retrieved November 15. 2011 from http://www.principlesofaccounting.com/

Retrieved January 21, 2012 from http://beginnersinvest.about.com/od/analyzingabalancesheet/a/retained-earnings.htm Retrieved January 21, 2012 from http://www.fasb.org/summary/stsum123.shtml Retrieved January 21, 2012 from http://www.investopedia.com/terms/p/preferredstock.asp