Financial Analysis Report: Comparing Ford and General Motors

This report presents a detailed financial analysis comparing Ford Motor Company and General Motors, two major players in the automotive industry. The analysis, conducted as part of an ACC 685 assignment, utilizes financial statements from the companies' 10-K filings to evaluate their performance across various metrics. The report begins with an introduction to the companies and the scope of the analysis. It then delves into ratio analysis, covering liquidity, capital structure, return on investment, operating performance, asset utilization, and market measures. The report also examines the accounting methods used by both companies, including those for leases, inventory, depreciation, and intangibles. It further discusses disclosures related to contingencies, accounting changes, financial instruments, long-term debt, incentive programs, pension benefits, and income taxes. The report concludes with an investment decision based on the 2018 financial performance, recommending an investment strategy based on the analysis conducted. The report uses common size financial statements and computes ratios such as current ratio, acid-test ratio, debt-to-equity, return on assets, and price-to-earnings ratio, among others. The analysis also incorporates information from recent quarterly filings (10-Q) to provide a comprehensive overview of the companies' financial health. The report covers the key financial ratios, accounting methods, and provides insights into the companies' financial health and investment potential.

Running head: FINANCIAL ANALYSIS
Financial Analysis
Name of the Student:
Name of the University:
Author’s Note:

1FINANCIAL ANALYSIS
Introduction
The financial analysis has been done for the two Automotive Company that is operating
in the US which are General Motors and Ford (Ford Motor Company - Financials . 2020). The
analysed companies are American Multinational Automaker that are operating as an American
Multinational Corporation and is primarily engaged in designing, manufacturing, marketing of
various automobiles (General Motors Company. 2020). The key competitor of the General
Motor Company and the key competitor of the company are primarily Ford Motors, Chevrolet,
Cadillac and General Electric.
Discussion and Analysis
Ratio Analysis
Liquidity Ratio: When evaluated from an liquidity perspective the Ford Company on a
comparative basis has performed better which had a ratio of 1.20 times, while General Motors
had 0.92 times. However, on the other hand side the collection period and inventory turnover has
been better for General Motors Company (Zainudin & Hashim, 2016).
Capital Structure: In terms of solvency the General Motor Company was having comparatively
lesser amount of debt and had a better interest coverage ratio than the Ford Company.
Return on Investment: The return generated on total asset was greater for General Motor
Company and was comparatively less for Ford Company. However, the return generated on
equity has been volatile for the General Motors due to change and variability in the net profit
reported.

2FINANCIAL ANALYSIS
Operating Performance: The operating perspective of the General Motors has been
comparatively better and higher than the Ford Company, due to higher amount of profitability
and revenue reported (Delen, Kuzey & Uyar, 2013).
Asset Utilization: In terms of utilization of assets, the Ford Company on a comparative basis has
done much better thereby effectively using assets and resources deployed.
Market Measures: In terms of valuation and earnings yield the Ford Company is slightly better
than General Motors.
Method of Accounting
 Leases: Both the companies intends to follow ASU 2016-02, "Leases" which is issued by
FASB but the same has not been adopted yet and the same allows the lessee to recognize
most leases on the balance sheet and listed as operating leases.
 Inventory: The inventory of both the companies is valued atat the lower of cost or net
realizable value as per the condition. The net realizable value is estimated on the basis of the
selling price of the business.
 Capitalization of Long term Assets: The assets of the business are capitalised on the basis
of whether any improvements are made considering whether the same are for long term
benefits or not.
 Depreciation: The depreciation charges are done on the basis of straight lien considering the
nature of the asset which is used by the business.
 Intangibles: The intangible assets of both the company are amortized on a straight-line or an
accelerated method of amortization over their estimated useful lives. Indefinite lives
intangible assets are not amortized which also includes goodwill.

3FINANCIAL ANALYSIS
 Investments: In case of General Motors, equity investments are accounted by the use of
equity method of accounting and which are not measured with this method are measured at
fair value. The management of Ford also uses equity method for measuring investments
made by the business.
Disclosures
 Contingencies: The management of General Motors has disclosed contingencies for
Litigation-Related Liability and Tax Administrative Matters and also various litigations
which is associated with the company. In the case of Ford as well appropriate disclosures
have been provided and the same are guarantees and indemnifications, litigation and claims,
and warranty.
 Accounting Changes: There has been no changes in accounting practices in the business of
General Motors whereas changes in its method of accounting for U.S. inventories to a first-
in, first-out basis from a last-in, first-out basis has been made by Ford Motors in 2018.
 Financial Instruments and Derivative: Both the companies shows appropriate disclosures
for financial instruments and derivatives along with accounting standards which is followed
for the purpose of such an accounting.
 Long-Term Debt: The debt which is taken by both the companies are appropriately
disclosed in the balance sheet as well as proper treatment for the same is also provided in the
annual report of the business.
 Incentive Programs: Both the companies shows proper disclosures for incentive programs
which are appropriately represented in the notes to account section.

4FINANCIAL ANALYSIS
 Pension/Retirement Benefits: Both the companies provide pension and other retirement
benefits which affect the liquidity status of the companies and therefore are appropriate
presented in the notes section.
 Income Taxes: The income tax amounts and the slabs which is used for computing the same
is shown in the notes section and the amount of income tax is shown in the profit and loss
account.
Additional Disclosures
The annual report of both the companies also provides additional disclosures which
relates to different accounting treatments which is shown in the balance sheet or the profit and
loss statement. Some of the disclosures such inventory and receivable disclosures, foreign
exchange translation and transactions disclosures are also included in the notes section for proper
disclosure requirements for the businesses (Gigler et al., 2014). The business of General motors
and Ford provides such kinds of disclosures in order to maintain transparency in the operations
of their business.
Comprehensive Items
The annual report of General Motors shows that comprehensive statement includes
foreign exchange translation and defined benefit plans which are adjusted to get the actual profit
during the period. In the case of Fords, the comprehensive income statement includes foreign
currency translation, Marketable Securities, Derivative instruments and pension benefits. These
items are adjusted to get profit after extraordinary items. The key financial ratios which are
computed are not affected by such an estimates or items.
Equity Method of Investment

5FINANCIAL ANALYSIS
As per the annual report of both the companies, the businesses utilize equity method for
measuring their investments made during the period. In the case of General Motors, equity
method of accounting is used for consolidated and non- consolidated affiliates. Automotive
China equity income is an example of non-consolidated affiliates. In the case of Ford, the
management also uses equity method for measuring investment for companies where there is no
control. There are numerous such companies and some are presented below:
Figure 1: (Companies over which there is no control)
Extraordinary Items
The businesses have some extraordinary items which are represented in the
comprehensive income statement and the same is accurate for both the companies. In addition to
this appropriate disclosures are provided in relation to the same as well.
Events

6FINANCIAL ANALYSIS
The business of General Motors shows that there are numerous regulations brought about
in the automobile industry which impacted the operations of the business and affected the flow
of revenue. The business also faces some financial stress due to the market conditions. In the
case of Ford as well, the US regulations and financial crisis in the market is affecting the
operations in an adverse manner (Zeff, 2013). These events would have direct impact on the
profitability and thereby affect the profitability ratios of the business adversely.
Management Policies
The management of the company has made changes to the accounting policies and
procedures so that efficiency can be maintained in the operations of the business. The policies of
the business also help in bringing about efficiency in the operations and the same would impact
the activities of the business in an adverse manner.
Credit Rating
The credit rating for General Motors is shown to be Baa3 and P-3 ratings which are
provided by Moody's Investors Service. On the other hand, Ford has a rating of Ba1 as per
Moody's Investors Service.
Investment Decision
On the basis of the financial performance for 2018, the investor should invest in General
Motors as they have a better profitability estimates as well as lower debt capital usage in its
operations. In addition to this provides proper returns to the shareholders.

7FINANCIAL ANALYSIS
Reference
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A
decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
Ford Motor Company - Financials . (2020). Shareholder.ford.com. Retrieved 21 February 2020,
from https://shareholder.ford.com/investors/financials/annual-reports/default.aspx
Gigler, F., Kanodia, C., Sapra, H., & Venugopalan, R. (2014). How frequent financial reporting
can cause managerial short‐termism: An analysis of the costs and benefits of increasing
reporting frequency. Journal of Accounting Research, 52(2), 357-387.
Shareholder Information | General Motors Company. (2020). General Motors Company.
Retrieved 21 February 2020, from https://investor.gm.com/shareholder
Zainudin, E. F., & Hashim, H. A. (2016). Detecting fraudulent financial reporting using financial
ratio. Journal of Financial Reporting and Accounting.
Zeff, S. A. (2013). The objectives of financial reporting: a historical survey and
analysis. Accounting and Business Research, 43(4), 262-327.