Analysis of Scholastic Corp's 2012 Financial Statements

This assignment provides a comprehensive financial analysis of Scholastic Corporation based on its 2012 Form 10-K report, with comparative data from Wiley & Sons. It covers various aspects including the company's business segments, revenue analysis, balance sheet, income statement, and statement of cash flows. The analysis includes calculations of financial ratios such as net asset turnover and average collection period, along with explanations of accounting treatments for items like depreciation, accounts receivable, and revenue recognition policies. Risks associated with the business and the impact of potential estimation errors are also discussed. The assignment leverages information directly from the 10-K filings to provide detailed insights into Scholastic's financial performance and position.

FINANCIAL ACCOUNTING
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PART 1: General Business of the Firm
1a. The largest segment for Scholastic in 2012 was Children’s Book Publishing and
Distribution which contributed approximately half of the revenue. It is also the fastest
growing segment for the company based on comparison of 2012 revenues with 2011
revenues.
1b. The company has approximately 9,200 employees with approximately 7,200 in USA and
remaining 2,000 outside USA.
1c. The business of the company is highly seasonal and strongly linked to the school year
basis. Thus the demand of the product is driven by the school year opening, vacations,
enrolments and examination calendar.
1d. The CEO of the company in 2012 was Richard Robinson while the CFO was Maureen
O’Connell.
1e. Out of the various risks listed in Item 1A, the most significant is the anticipation of trends
and development of new products in accordance with the preferences of the consumers. This
is imperative since the business landscape is quite competitive and additionally owing to
impact of technology, the preference of the consumers has become quite dynamic. As a

result, in order to sustain the market share and competitive advantage, future consumer needs
understanding and estimating is of prime importance.
1f. One example of disclosure of a contract of executory nature is the entering of revolving
loan facility where the agreement for the facility has been enacted but the expense would be
indicated only when the given facility is used and amount drawn on the given facility.
1g. Auditor of Scholastic Corporation for 2012 was Ernst & Young. Auditor for Wiley &
Sons for 2012 was KPMG. I do find the audit report of the two firms similar.
PART 2: BASIC BALANCE SHEET AND INCOME STATEMENT
2a. The increase in cash in 2012 was on account on higher profit generation which was
significantly higher than 2011. The 2012 net income was about 150% higher than the
corresponding net income for 2011. The higher profits in 2012 were driven by both revenue
growth and widening of profit margins.
2b. Total creditor financing in 2012 = $ 119.6 million
Total assets in 2012 = $ 1,670.3 million
Hence, percentage contribution from creditor financing = (119.6/1,670.3)*100 = 7.16%
Total owner financing = $ 830.3 million
Hence, percentage contribution from owner financing = (830.3/1,670.3)*100 = 49.71%
2c. The largest current liability for Scholastic is other accrued expenses ($ 233.5 million for
2012). The largest current liability for Wiley is deferred revenue ($342.03 million for 2012).
2d. The statements of the company are articulate. The closing cash balance highlighted in the
balance sheet for Stochastic for 2012 was $ 194.9 million which is the same as the figure
obtained for 2012 in cash flow statement. The net income for the company in 2012 was $
102.4 million out of which $ 13.2 million was the outflow on dividends and the remaining is
reflected in the retained earnings.

2e. The gross profit of Scholastic in 2012 was 2148.8 million – 989.2 million = $1.159.6
million. The gross of Wiley in 2012 was 1748.74 million – 543.396 million = $ 1,239.346
million.
The gross profit of the two companies is different owing to the difference in customer base
for the two companies. Scholastic tends to be more focused on schools whereas Wiley is
more focused on content related to higher education and thereby caters to a different
clientele.
2f. The selling, general and administrative expenses for the company would comprise of
expenses incurred related to selling of the books and digital content which would involve
commission to partners and sales agents. Besides, administrative and general expenses with
regards to day to day business such as maintaining records, warehouse for inventory storage,
providing logistic and other support services to the business.
PART 3. STATEMENT OF CASH FLOWS
3a. The operating cash flows are significantly higher than the net income in 2012 for Scholastic.
Net income (2012) = $ 102.4 million
Net cash provided by operating activities = $ 260.2 million
3b. The depreciation amount charged is same in both annual report and statement of cash flows i.e. $
68.8 million for 2012. Depreciation is added to net income in the operating cash flows as depreciation
is a non-cash expense and does not result in actual cash outflow. As a result, adjustment for
depreciation is to be made and net income is increased by an equivalent amount.
3c. The change of working capital in the balance sheet cannot be tied with the corresponding changes
in the cash flow statement since the working capital items in the balance sheet would reflect items on
accrual basis. This is not the case with cash flow statement which would concentrate on the actual
cash changes with regards to the working capital and their impact in the operational cash flows
primarily.
3d. Scholastic investing cash flow have been used on majorly two activities i.e. acquiring property,
plant and equipment along with expenditures related to prepublication and production. A small
portion of the amount has been used to make payment related to acquisition. In case of Wiley,
majority of the investing cash flow is related to acquisitions followed by investment in technology,
property and equipment. Also, some amount of money is spent on composition.

3e. The key items related to financing activities in relation of Scholastic in 2012 were related to
borrowing and payment of lines of credit, note and revolving loan. Additionally, the changes in terms
of outstanding common stocks are also reflected here. A key item besides the above is dividends. The
comparison of 2012 figures with 2011 figures highlights lower borrowings from different sources
coupled with lower repayments. Further, there was an increase in dividends payment coupled with
stock based compensation plans in 2012.
3f. The effect of exchange rate tends to depend on the respective exposure and hedging strategy
deployed by the given company. Besides, the nature of exposure can be every different for the two
companies. For instance, one company may be an exporter while the other may be an importer and
hence even though the currency fluctuations are the same but the exchange rate effect can be different.
Also, the effectiveness and extent of hedging of foreign currency exchange risk is also a crucial
element that produces differential impact.
PART 4. REVENUES
4a. Net revenues for Scholastic (2012) = $ 2148.8 million
Net revenues for Scholastic (2011) = $ 1887.9 million
% percentage in net revenues = [(2148.8-1887.9)/1887.9]*100 = 13.82%
Net revenues for Wiley (2012) = $1782.742

Net revenues for Wiley (2011) = $1,742.551
% percentage in net revenues = [(1782.742-1742.551)/1742.551]*100 = 2.31%
It is apparent the growth of Scholastic has been faster in comparison with Wiley. For
Scholastic, the key driver for change was the Children’s Book Publishing and Distribution
segment which witnessed the fastest growth.
4b. Gross Revenue = Net Revenue + Refunds = 2148.8 million + 81.8 million = $ 2,230.6
million
4c. The exact amount of cash or credit returned to the customer for 2012 was $ 81.8 million.
4d. Underestimation of returns by the company by 1% would lead to a higher reporting
income in 2012 as the net revenues realised in the income statement would be higher than the
actual revenues that the company should have realised. Higher sales volume would lead to
higher operating income for 2012.
The operating income in the future would be adversely impacted as part of this as revenue
from the future years has been realised in 2012. Further, the company may revise the return
rates higher for future years which would further lower revenue. The actual returns in the
future would not be impacted by the company estimates.
4e. From the notes to account, it is apparent that magazine revenue recognition follows the
cash since the revenue is recognised on an accrual basis i.e. when there is delivery of
magazine. Thus, cash payment precedes revenue recognition.
4f. It is not correct to label the royalty advances as deferred revenues as the same as has
recognised as asset in the balance sheet and not as liabilities.

4g. Net Asset Turnover (Stochastic) =2148.8 /((1670.3+1407)/2) = 1.40
Net Asset Turnover (Wiley) = 1782.742/((2532.946+2430.141)/2) = 0.72
The net asset turnover is significantly better for Stochastic which may be attributed to the
difference in revenue and customer segments owing to which Stochastic has a lighter model
when it comes to asset.
4h. The relevant disclosure related to revenue recognition policy of the company with regards
to school based book fairs. This is indicated below.
Sales for the full fair = $ 4000
Duration of fair = 5 days
Sale per day = (4000/5) = $ 800
Only three days lie within the reporting period, hence sales included in the reporting period =
800*3 = $ 2,400
The remaining sales would be deferred to the next reporting period.
PART 5. ACCOUNTS RECEIVABLE
5a. The relevant schedule is indicated below.
The correct amount that is written off is $ 8.7 million in 2012.

5b. Yes, the same figure can also be derived from the footnotes.
5c. Gross accounts receivable (2012) = Net accounts receivable (reported in balance sheet) +
allowance for doubtful accounts = 314.1 + 25.9 = $ 340 million
5d. This is added owing to the failure by the company to recover the accounts receivable
which tends to result in lesser cash flows than estimated from the net income of the
operations of the company.
5e. The aging method is used for determination of allowance for doubtful debt which is
indicated in the relevant accounting policies.
5f. Average collection period = (Average receivables/Credit Sales) *365
Average collection period for Scholastic = [((314.1+220.3)/2)/2148.8]*365 = 45.39 days
Average collection period for Wiley = [((171.561+168.310)/2)/1782.742]*365 = 34.79 days
Hence, the collection period is lower for Wiley which may be on account of the difference in
revenue mix and the intended audience for the two companies.
5g. Bad debt expense related to Borders in 2011 = $ 9.3 million
Total provision for bad debt in 2011 = $ 13.989 million as shown below.
Hence, requisite value = $13.989 million - $9.3 million = $ 4.689 million