Accounting Financial Analysis Report: DuPont Decomposition, Cash Flow Statement, Inventory Turnover, Default Rate, and FCFU

This report covers topics such as DuPont Decomposition, Cash Flow Statement, Inventory Turnover, Default Rate, and FCFU in Accounting Financial Analysis. It includes a summary of the content, subject, course code, course name, and college/university.

Accounting financial analysis
report
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Question 1
1. Decreasing the useful life estimate on a firm’s PPE has no effect on a company’s free
cash flow measure
Ans. True, because decreasing the useful life estimate on a firm’s PPE has impact on company’s
cash flow measure.
2. A decrease in average day’s payables outstanding provides information on how quickly a
firm collects cash from sales to customers.
Ans. False, because decreasing in average day payables outstanding does not provides
information on how quickly a firm collects cash from sales to customers. Average day
receivables outstanding show that information about cash from sales to customers.
3. Holding ROA constant, higher financial leverage leads to higher ROE, creating more
value for shareholders.
Ans. False, ROA show overall profitability of invested assets and it is also known as Return on
Investment. Holding ROA does not create more value for shareholders.
4. Everything else equal, the volatility of ROE is higher in companies with higher financial
leverages.
Ans. True, when companies with higher financial leverages the ROE is also become higher.
5. The results from using discounted FCFU method to estimate firms’ intrinsic equity
values are sensitive to assumptions about firms’ future dividend polices.
Ans. True, when the results from using discounted FCFU method to estimate firms’ intrinsic
equity values are sensitive to assumptions about firms’ future dividend polices
6. Firm ABC’s balance sheet reported a more current assets than its current liabilities on fiscal
year end of 12/31/2017. Had firm ABC delayed payments to suppliers (i.e., pay less to suppliers
than it actually did) during 2017, what effects would it have on its
Ans. (a) Decrease (b) Decrease (c) Decrease
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If the current asset is more than the current liabilities than the current ratio is decreases whereas
when the company made delayed payments to suppliers the payable turnover is also decreases
and it will also not impact on cash cycle days of the company.
7. Everything else equal, selling a recognized intangible asset, such as a patent, for a gain
(compared to not selling the intangible asset) would have what effects on the following
metrics:
Ans. (a) Decrease (b) Decrease (c) Increase
When the company sells recognized intangible assets then debt to asset ratio is decreases and
cash (used in) from operations is also decreases. Cash (used in) from investments is increases
because company sells its assets and earns cash.
8. Everything else constant, compared to the point of sale method of revenue recognition
(the one used by Patten Corp.), installment method of revenue recognition would have
what effects on the following metrics:
Ans. (a) Unclear (b) Decrease (c) No effect (d) No effect
In the company, when everything is constant but the sale method of revenue recognition
installment method of revenue recognition would have no impact on revenue growth rate but
accounts payable turnover ratio decreases. There is no impact on gross margin percentage and
also no impact on cash from operations.
Question 2
Cash Flow Statement A: Mature/decline phase
Reasons:
1. As compare to other year, in 2016 the cash and cash equivalents end of period was less than
other year because available cash to the company in 2016 was less than as compare to the other
years.
2. The cash flow statement of a company in a mature/decline phase due shortage of cash in hand
or cash at bank.
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3. Another reason is that in 2016, the company used cash in investing and financing activities
which impact on cash availability.
4. The company’s cash flow statement in the position of mature/decline due to inefficient cash
management.
5. Another reason is that, the company utilizes cash in purchasing or acquiring the assets and
repayment of debts and dividends to the outsider parties.
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Cash Flow Statement B: Introductory/growth phase
Reasons:
1. First reason is that the company has sufficient cash in hand or at bank.
2. Second reason is that the company generated cash from financing activities which cover
investing and operating activities.
3. The company’s cash and cash equivalents at the end of the period is in growing phase from
2013 to 2015 which represents company’s growth and beneficial for the investors.
4. Due to financing activities, the company generated more cash for other business operations
and also for the stakeholders.
5. Last reason is that the company has efficient cash management team and also has good short-
term planning.
Question 3
Income statement for fiscal year 2019E 2018 Actual
Net sales 9,400 8,910
Membership revenues 295 422
Total revenues 9,695 9,332
Cost of sales and related buying and occupancy costs (6,066) (6,020)
Selling, general and administrative expenses: (2,664) (2,819)
Earnings before interest and income taxes 965 493
Interest expense, net (125) (118)
Earnings before income taxes 840 375
Income tax expense (330) (158)
Net earnings 510 217
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BALANCE SHEET on fiscal end of year 2019E 2018 Actual
Assets
Current assets:
Cash and cash equivalents (O) 1860 1,251
Accounts receivable, net (A) 2210 2,254
Merchandise inventories 1,045 1,146
Current deferred tax assets, net 252 140
Prepaid expenses 34 23
Total current assets 5401 4,814
PPE Gross (B3) 2365 3,000
Accumulated depreciation (B2) 335 635
PPE Net (B1) 2030 2,365
Goodwill 53 53
Other assets 285 415
Total assets (C) 7769 7,647
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable 834 844
Accrued salaries and related benefits 505 575
Other current liabilities 683 833
Current portion of long-term debt (D) 95 95
Total current liabilities 2117 2,347
Long-term debt, net 2,977 2,965
Other liabilities 1,101 1,021
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Total shareholders’ equity (E) 1574 1,314
Total liabilities and shareholders’ equity 7769 7,647
Pro forma statement of cash flows for year of 2019
Operating activities
Net earnings 510
Depreciation 300
Loss from selling the building (F) (20)
Deferred taxes (112)
Changes in other accounts:
Accounts receivables 44
Merchandise inventories 101
Prepaid expenses (G) (34)
Accounts Payable (H) (10)
Accrued salaries, related benefits, and other liabilities (140)
Cash flows from (used in) operating activities (P) 639
Investing activities
Capital expenditures (I) (380)
Proceeds from selling PPE (J) 335
Sale of other assets 130
Cash flow from (used in) investing activities (Q) 85
Financing activities
Principal payments of long-term debt (K) (12)
Proceeds from long term borrowing (L) 80
Cash dividends paid (M) 77
Stock repurchases (N) (260)
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Cash flows from (used in) financing activities (R) (115)
Net increase (decrease) in cash and cash equivalents (S) 609
Cash and cash equivalents at beginning of year 1,251
Cash and cash equivalents at end of year (T) 1860
Question 4
1. (20 points) Show the key components for the Advanced DuPont decomposition for fiscal
2016, using beginning balances for balance sheet accounts when stated
Item description Amount
NOA (at beginning of fiscal 2016) 3081
Effective tax rate (for fiscal 2016) 48.245%
NOPAT (for fiscal 2016) 416.62775
RNOA for fiscal 2016 13.5224846
Net Debt at beginning of fiscal 2016 2210
Net Debt
SHE at beginning of fiscal 2016
2.5373
Net Interest Rate after tax for fiscal
2016 2.8338348%
Spread 10.6886498
Spread * Financial Leverage 27.12045472
ROE for fiscal 2016 40.64293932
2. Based on the reported numbers on income statement and balance sheet, what is your
best estimate for Nordstrom’s inventory turnover days in fiscal 2016: (Use the average
balance for inventory?)
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Ans. Inventory Turnover = Cost of Goods Sold/Average Total Inventory
= $9440/$1920.5
= 4.92 times
Inventory Turnover Days = 365/4.92
= 74.25662 days.
3. Nordstrom’s footnote discloses the following information (not shown in the excerpt):
“We routinely enter into arrangements with vendors whereby we do not purchase or pay for
merchandise until the merchandise is ultimately sold to a guest. Activity under this program is
included in sales and cost of sales in the Consolidated Statements of Operations, but the
merchandise received under the program is not included in inventory in our Consolidated
Statements of Financial Position because of the virtually simultaneous purchase and sale of
this inventory.”
Would this additional information make you revise your estimation of Nordstrom’s
inventory turnover days? Clearly pick one of the three choices below (and delete the
others) and briefly state why.
Ans. Yes, I would revise my estimation to be higher than my answer in question 3.
Brief reason is that “This is because the numbers for merchandise in inventory would be
higher. Including the above in inventory would increase average total inventory thereby
reducing inventory turnover. Lower inventory turnover would result in an increase in
inventory turnover days.”
4. Nordstrom’s cash cycle days in fiscal 2016
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Ans. 27.896 days
Receivables Turnover or Debtors Turnover ratio = Net sales/Average net trade receivables
= 14,448/197.5
= 73.407 times
Average receivable collection days = 365/73.407
= 4.97 days
Operating cycle = Receivable collection days + Inventory holding days
= 4.97/74.256
=79.226 days
Payable turnover = (Cost of goods sold + Change in inventory)/ Average accounts payable
= (9440 + 31)/ 1332
=7.11 times
Average payable days = 365/Payable turnover
= 365/7.11
= 51.33 days
Cash Cycle = Operating Cycle – Average Payable days O/s
= 79.226 – 51.33
= 27.896 days
5. Nordstrom presents net accounts receivable on the balance sheet. Assume the allowance
was $7 at January 28, 2017 and $9 at January 30, 2016. What is Nordstrom’s estimated
default rate for its credit card receivables as of
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Ans. On January 30, 2016 = 7%
Note: Nothing was mentioned for the previous year i.e. 2015, that’s why we considered 7% as a
Estimated default rate for 2016 (assumption)
On January 28, 2017 = 9-7/9*100 = 22.22%
6. How does the change of estimated default rate affect the actual time it takes Nordstrom
to collect cash from its receivables
Ans. Increase, if there is change in estimated default rate the actual time to collect the cash from
its receivables is also increases.
7. Assuming there is no effect on taxes paid to IRS, had Nordstrom maintained the same
estimated default rate, would their cash from operations in fiscal 2016 be
Ans. The same, if there is no change in tax rate the company can maintain its estimated default
rate and the cash from operations in fiscal year is also same.
8. What’s your best estimate for the average useful life estimate used by Nordstrom for its
land, buildings and equipment (you can assume salvage value of 0):
Ans. Average useful life = Gross PPE/Depreciation expense
= 9493/645
= 14.7178 years
The best estimate for the average life estimate used by Nordstrom for it land, buildings and
equipment is 14.7178 years.
9. If Nordstrom decreases the average useful life estimate of all PPE by 2 years,
would their cash from investing activities for fiscal 2016 be:
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Ans. The same
If the company decreases the average useful life estimate of all PPE by 2 years, the cash from
investing activities for fiscal year 2016 will be the same.
Would their EBIT margin for fiscal 2016 be
Ans. The same
The EBIT margin will also be same and there is no impact on it.
10. Assume accumulated depreciation as of January 28,2017 was 878 for buildings and
building improvements; 1,543 for leasehold improvements; and 2,214 for store fixtures and
equipment. Of these three types of fixed assets, which has been used for the greatest
percentage of its useful life?
Ans. Buildings/Improvements because uses fully in its useful life. The company uses buildings
and building improvements in the greatest percentage of its useful life.
11. What was Nordstrom’s FCFU (free cash flow unlevered) for fiscal 2016?
Ans. CFO + after- tax net expense = 1648 + 121*(1-0.48345614)
= 1710.622807
Capex + Others
= -846 + 55 = -791
FCFU = 1710.622807 – 791
= 919.622807
12. The market value for Nordstrom’s common shares was $7,518 million on Jan. 28, 2017.
Assume Nordstrom is at its steady-state and that its FCFU will grow 3% annually from its
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2016 level into perpetuity. Under these assumptions, what was the implicit WACC rate
embedded in the market valuation of Nordstrom’s stocks?
FCFU = 919.622807
Terminal value = FCFU*(1+g)/ (WACC-g)
7518 = 919.622807 + 919.623 * (1.03)/ (WACC-g)
Solving for WACC in the above gives
WACC = 17.35%
Question 5
1. RNOA (Return on Net Assets) = NOPAT/NOA
Net operating profits after tax = Operating Income*(1-tax rate)
= 1323*(1-0.30)
= 926.1
Tax rate assume by 30%
Net operating assets= (Total assets- Cash) – (Total Liabilities- Debt)
= (8574- 1194) – (8574- 3106)
= 1912
RNOA = 926.1/1912*100
= 48.44%
2. (a) 13.5% (b) $108
3. (a) NOA = 3999 or 4000
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(b) NOPAT in 2014 = Operating Income* (1 – tax rate)
Tax rate = 30% Assume
= 1323* (1-0.30)
= 926.1
(c) RNOA = NOPAT/NOA
=1323/3999
= 33.0832708%
4. NOA = (Total assets- Cash) – (Total Liabilities- Debt)
= (8574- 1194) – (8574- 3106)
= 1912
5.
As reported Scenario 1 Scenario 2
Net Sales 13,110 13110 11799*
Credit card revenues 396 396 396
Total revenue 13,506 13506 12195
Cost of sales and related buying and
occupancy costs + operating
expenses related to credit segment
(8,406) (8406 + 194) (8406 + 194)
Selling general and administrative
expenses
(3,777) (3,777) (3,777)
Earnings before interest and income
taxes
1,323 1,129 (182)
Interest expense, net (138) (138) (138)
Earnings before income taxes 1,185 991 (320)
*13110 – (13110*10%) = 11799
6.
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Scenario 1 Scenario 2
NOPAT 790.3 Nil
RNOA 19.76% Nil
NOPAT = Operating Income* (1- Tax rate)
1= 1,129* (1-0.30)
= 1,129* 0.70
= 790.3
RNOA = NOPAT/NOA
= 790.3/3999*100
= 19.76%
2. In scenario 2, NOPAT is not calculated because the company in loss. RNOA will also not
calculate because non-availability of operating income.
Note: When NOPAT is nil, it means that the firm income from non- operating activities.
7. Yes, the company made correct decision to dispose of its credit card operation because the
company cannot earn revenue as per their requirement. From 2012 to 2014, the company credit
card revenue change only 5% and the company do not earn enough revenue. In the case of credit
expenses, the company expenses increases from 2012 to 2014 which indicate that the company is
not satisfied with this operations. So, it is better to close this business operation and invest their
money and other useful investment in different business operations. The company faces growth
in expenses in each year and revenue increases lit bit which reflects that the company not earn
revenue as per decided by the management.
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