Historical Financial Statements

Part 1

: Appendix A [WLO: 3] [CLO: 1]

Any equity research report will include the historical financial performance of the company. The financial statements form the basis of facts for the company and those facts contribute to the determination of the buy, hold, or sell investment recommendation. For this assignment, you will use the Mergent database through the university library to retrieve 3 years of financial statements (i.e., the income statement, balance sheet, and statement of cash flow) for your chosen publicly traded company that pays dividends. You should use the same company you picked for your Post Your Introduction discussion forum. Then you will format that financial information using a spreadsheet program like Excel. The video below explains how to format your company’s financial information.

Title this assignment “Appendix A.” Be sure to save both formats (Excel and PDF) of these files for later use.

Note: You will use all of the assignments in Weeks 1 through 4 for your Week 5 final project for this course.

Prepare:

Prior to beginning work on this assignment,

BUS401| Retrieving Financial Statements Using Mergent  (Links to an external site.)  (Links to an external site.)

Research:

Using the Mergent database in the university library,

  • Find your chosen dividend-paying company within the Mergent database. MFA Financial is the company I selected.
  • Follow the instructions in the video above to retrieve and format the 3 most recent years of historical financial statements (income statements, balance sheets, and statements of cash flows).

Construct Appendix A:

  • Retrieve the 3 most recent years of historical financial statements (income statements, balance sheets, and statements of cash flows) for your chosen company using Mergent. Then using a program like Excel, and based on the instructions in the BUS401 | Retrieving Financial Statements Using Mergent (Links to an external site.) video.
    • Format the income statement.
    • Format the balance sheet.
    • Format the statement of cash flows.
  • Save this Excel file as a PDF and title it “Appendix A.”

Submission Format:

  • Submit the PDF version of Appendix A to Waypoint.

Historical Financial Statements: Appendix A PDF file

  • Must contain the formatted income statement, balance sheet, and statement of cash flows for a company that has paid dividends for the last 4 to 5 years.

PART 2

Common Size Financial Statements: Appendix B [WLO: 4] [CLO: 2]

In your first assignment this week you retrieved the financial information for your chosen company. Analysts must evaluate a company’s financial statements to understand its performance over time. Common size statements “allow analysts to compare the relative composition of the company’s accounts over time” (Hickman et al., 2013, Section 11.3, para. 5). For this assignment, you will take the formatted financial statements you retrieved using Mergent and construct common size income statements and common size balance sheets for your chosen company. The video below explains how to construct a common size income statement and balance sheet using Excel.

Title this assignment “Appendix B.” Be sure to save both formats (Excel and PDF) of these files for later use.

Prepare:

Prior to beginning work on this assignment,

  • Review Chapter 2 and Chapter 11: Section 11.3 in Essentials of finance.
  • Complete the Week 1 – Assignment 1, Historical Financial Statements: Appendix A
    • You will be using the Excel file from Mergent for this assignment
  • Watch the following video that will go over how to create and format Appendix B:

 (Links to an external site.)

BUS401| Creating Common Size Financial Statements in Excel (Links to an external site.)

Construct Appendix B:

Using the formatted income statement and balance sheet in Excel from Week 1 – Assignment 1, and following the instructions in the BUS401| Creating Common Size Financial Statements in Excel (Links to an external site.) video,

  • Calculate and format the common size income statement for the three years.
  • Calculate and format the common size balance sheet for three years.
  • Save this Excel file as a PDF and title it “Appendix B”.

Submission Format:

  • Submit the PDF version of Appendix B to Waypoint.

The Common Size Financial Statements: Appendix B PDF file must contain the formatted common size income statement and balance sheet.

Carefully review the Grading Rubric (Links to an external site.) for the criteria that will be used to evaluate your assignment.

PART 3

Section : Financial Statement Analysis [WLO: 5] [CLOs: 1, 2]

In order to determine if you can recommend buying or selling a stock, you first must understand how the company has performed recently. Would you want to invest in a company that has had negative earnings for the past 3 years? What about a company that has increased the amount of debt on its balance sheet? Or, would you prefer to invest in a company that has had consistent increases in revenues or net earnings over the past 3 years? As the equity analyst, your first task would be to determine the evidence of patterns in the recent financial performance. The financial analysis provides significant insight into the company’s strengths and weaknesses.

To fully understand a company’s financial performance, you cannot “evaluate performance using numbers alone. This level of analysis does not involve an understanding of the cause of performance…an analyst must look beyond the numbers” (Hickman et al.,  2013, Section 11.3, para. 7). In the real world, an analyst spends extensive time and effort researching the business strategy, operations, marketing, and other elements that have contributed to this financial performance. For this class, you will limit your investigation of the company to the historical financial analysis, ratio and competitive analysis, and the valuation of the stock. This Week 1 assignment will become Section 1 of the Week 5 final project.

Prepare:

Prior to beginning work on this assignment,

Write:

For this assignment, address the following seven parts in a Word document:

Part 1: Overview of the company (one paragraph)

  • State the name of the company.
  • Provide a brief overview of the company you selected, including a description of its business operations.
  • State the current market price per share.

Part 2: Income statements (one to two paragraphs)

  • Summarize key trends in revenues, operating income, and net income over the last 3 years.

Part 3: Common size income statements (one paragraph)

  • Evaluate the trends in gross margin, operating income margin, and net profit margin over the past 3 years.

Part 4: Balance sheets (one to two paragraphs)

  • Summarize key trends in total assets, total current assets, total current liabilities, long-term debt, and total shareholders’ equity over the past 3 years.

Part 5: Common size balance sheets (one paragraph)

  • Evaluate the trends in total current assets as a percent (%) of total assets, total current liabilities as a percent (%) of total assets, long-term debt as percent (%) of total assets, and total shareholders’ equity as a percent (%) of total assets over the past 3 years.

Part 6: Cash flow (one paragraph)

  • Calculate simple cash flow for the past 3 years.
    • Show your calculations.
  • Summarize the trend in simple cash flow for the past 3 years.
  • Compare the simple cash flow to the net operating cash flow from the statement of cash flows for the past 3 years.

Part 7: Financial analysis conclusion: (one paragraph)

  • Determine the strengths and weaknesses of the company based primarily on the trends in items discussed from the income statements, balance sheets, common size income statements, and common size balance sheets, as well as the comments on cash flow.
  • Create a table that indicates whether each financial fact is a strength or a weakness.
  • Determine the overall financial strength of the company based on the financial facts included as strengths or weaknesses.
    • Categorize the overall financial performance of the company as strong, neutral, or weak.
    • Justify your conclusion based on the table you created. 

The Section 1: Financial Statement Analysis

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