FINANCIAL STATEMENTS 1

Financial Statements Lester M. Legette Trident University International

ACC501- Accounting for Decision Making Dr. Ralph Wayne Ezelle 23 January 2012

FINANCIAL STATEMENTS Financial Statements When determining the overall financial health of any organization, financial statements are invaluable. Financial statements are prepared by an organization and provide various interested parties with necessary information about the financial standing of that organization. Financial statements are usually found in the Annual Reports that all publicly traded organizations are required to produce by the Securities and Exchange Commission (SEC). There are four main financial statements: balance sheets, income statements, cash flow statements, and statements of shareholders equity. For the purposes of this paper we will only deal with the first three. Balance sheets provide information about what a company owns and what it owns at a fixed point in time, usually the end of the year, while income statements show how much money a company made and spent over a period of time, usually the course of a year. And finally, cash flow statements summarize the sources and uses of cash and is a good indicator of whether a company has enough cash available to carry on routine operations. In this paper, several accounting terms and principles dealing with financial statements will be examined, and the financial statements of three separate companies will be evaluated. Accounting Standards Generally Accepted Accounting Principles (GAAP). Abercrombie & Fitch, a US based corporation uses the GAAP method to report their financial statements. GAAP is known as a common set of accounting principles, standards, and procedures that companies use to compile their financial statement. GAAP is a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information. 2

FINANCIAL STATEMENTS 3 To expand on this definition of the generally accepted accounting principles, it implies that they represent a concept well known to CPA and sophisticated users of financial statements. However, no official list of accounting principles exists. GAAP are highly recommended for use by companies and is extremely important so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. Companies are expected to follow GAAP rules when reporting their financial data via financial statements. International Financial Reporting Standards (IFRS). Hennes & Mauritz a Sweden-based company uses the International Financial Reporting Standards (IFRS) to report their financial reports. IFRS are standards, interpretation, and the framework for the preparation and presentation of financial statements. Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and SICs. The IASB has continued to develop standards calling the new standards IFRS, (IFRS, n.d.). Generally Accepted Auditing Standards Hennes & Mauritz, and Abercrombie & Fitch use GAAS for their auditing purposes. The generally accepted auditing standards (GAAS) are the standards which are used for auditing private companies. GAAS comes in three categories: general standards, standards of fieldwork, and standards of reporting. GAAS are the minimum standards used for auditing companies. In addition the Public Company Accounting Oversight Board (PCAOB) has adopted these

FINANCIAL STATEMENTS 4 standards for public (traded) companies. General standards are standards that address your qualifications to be an auditor and the minimum standards for your work product. Standards of field work govern how you actually do your job. Lastly, a standard of reporting involves information you must consider prior to issuing your audit report, (GAAS, n.d.). International Auditing and Assurance Standards The International Auditing and Assurance Standards Board (IAASB) objective is to serve the public interest by setting high-quality auditing and assurance standards by facilitating the convergence of international and national auditing and assurance standards, thereby enhancing the quality and consistency of practice throughout the world and strengthening public confidence in the global auditing assurance profession. Currently there are over 125 countries using or are in the process of adopting international standards on auditing (ISAs), issued by the IAASB, into their national auditing standards or using them as a basis for preparing national auditing standards. Al l five terms mentioned relate to each other in one form or another. However, they all share one common result and that is they are standards for governing financial statements, (IAASB, 2011). Comparing Annual Statements In comparing the financial statements of Abercrombie & Fitch and Hennes & Mauritz, I found that A&F financial statements were more detailed and a lot easier to understand even for the most inexperienced investor. A&F financial sheets were broken down with titles and subtitles so that investors can see exactly where the money is going, and what areas are doing the best. The data in this format gives investors the best information so that they can make smart financial decisions. A&F financial statements were also prepared in US currency.

FINANCIAL STATEMENTS 5 H&M statements are prepared in SEK; this would make it more difficult for American investors, because you have to convert the currency to USD. H&M financial statements were very broad and not broken down as much as A&F, which would make it difficult for investors to see exactly where to money is going, and in return would make it difficult for investors to make smart financial decisions based on the information provided. The financial statements are not very comparable with the naked eye. In order to compare these annual statements you must have the means to convert USD to SEK or vice versa. The fact that A&F has broken their statements down to the lowest level makes it difficult to believe the numbers from H&F, which in return makes it a little challenging to compare the statements and make a smart financial investment decision. Which of the two companies is most profitable? In the Charts below we analyze and compare the Balance sheet, Income statement, and the cash flow statements from both companies noted in this case study. Comparing the figures from 2009, Abercrombie & Fitch had a better year than Hennes & Mauritz. A&F profited more in the following areas: income, investments, and equity. A&F showed profits for 2009, they began the year with $522,122 cash and equivalents, and ended the year $680,113 they have showed an increase in profits for the last three years, in fact since 2007, they have more than tripled their Cash and Equivalents. In the last three years, H&M has reported negative numbers on the cash flow, and income statement. Negative numbers were noted in current operations, cash flow from changes in working capital, investment activities, and financing activities. H&M ended 2009 with a

FINANCIAL STATEMENTS 6 negative cash flow of -1,530(SEK). In 2009 H&M started out with 22,726 (SEK) liquid funds, they ended the year with 19,024(SEK), which was a non-profit of 3,702(SEK). Difference in profitability The profitability between the two companies can be explained simply by the fact that although H&M is ending the year with profit in Liquid cash, they are still taking losses in investments, current operations, financing activities, and cash flow for the year. H&M also started 2009 with 22,726(SEK) and ended with 19,024(SEK) they have also taken a lost in 2010 they started out with 19,024(SEK) and ended with 16,691(SEK). A&F has showed nothing but profit in fact they have been increasing their profit every year since 2007. Although A&F took a slight lost in Investing Activities in 2009 they made up for it with Financing Activities. Information used to answer the above questions I used different sources to answer the questions above. I had to use the USD converter in order to compare the numbers on the financial statements. I used the financial statements off of Company websites to in order to compare the two companies. I was also able to use www.reuters.com to get a real time reading of how the companies are doing in the stock market today A&F is up 44.74USD and H&M is 31.75USD which was another indicator that A&F is doing better financially. In all, if I was an investor looking to invest in a company, I would go with A&F, because the data prepared was easier to turn into useful information, and get a true reading on all of the areas that are doing well. I felt more comfortable with the information that was presented by A&F, I felt like they were not trying to hide anything.

FINANCIAL STATEMENTS 7 BALANCE SHEET A&F Total Assets 2007 2008 2009 $2,248,067 $2,567,598 $2,848,181 Total Equity 2007 2008 2009 $1,405,297 $1,618,313 $1,845,578 Total Liabilities 2007 2008 2009 $842,770 $949,285 $1,002,603 H&M Total Assets 41,734(SEK) 51,243(SEK) 54,363(SEK) Total Equity 32,093(SEK) 36,950(SEK) 40,613(SEK) Total Liabilities 9,641(SEK) 14,293(SEK) 13,750(SEK) Total Equity and Liabilities 41,734(SEK) 51,243(SEK) 54,363(SEK)

Total Equity and Liabilities 2007 2008 2009 $2,248,067 $2,567,598 $2,248,181

FINANCIAL STATEMENTS 8 INCOME STATEMENT A&F Cost of goods sold 2007 2008 2009 $1,238,480 $1,152,963 $1,045,028 Gross Profit 2007 2008 2009 $2,488,166 $2,331,095 $1,883,598 Operating Income 2007 2008 2009 $778,909 $498,262 $117,912 Net Income 2007 2008 2009 $475,697 $272,255 $254 H&M Cost of goods sold -30,499(SEK) -34,064(SEK) -38,919(SEK) Gross Profit 47,847(SEK) 54,468(SEK) 62,474(SEK) Operating Profit 18,382(SEK) 20,138(SEK) 21,644(SEK) Profit for the year 13,588(SEK) 15,294(SEK) 16,384(SEK)

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STATEMENT OF CASH FLOW A&F Net Cash Operating Activities 2007 2008 2009 $817,524 $490,836 $402,200 Investing Activities 2007 2008 2009 $500,170 $113,217 $111,561 Financing Activities 2007 2008 2009 $282,755 $30,469 $136,050 H&M Cash Flow Current Operations 15,381(SEK) 17,996(SEK) 17,973(SEK) Investing Activities -9,515(SEK) -1,090(SEK) -8,755(SEK) Financing Activities -9,515(SEK) -11,584(SEK) -12,825(SEK) Cash flow for the year 6,010(SEK) 5,292(SEK) -1,530(SEK)

Cash and Equivalents, end of year 2007 2008 2009 $118,044 $522,122 $680,113

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Company Abercrombie & Fitch CO.

Comparisons Steadily increased their profits and sales over the past several years; investing in research and development of new technologies, expanding services and products, and acquiring new business segments. Decrease in profits and sales. Took a lost in cash flow from changes in working capital, investment activity, financing activities, cash flow for the year

Conclusions A&E should continue to show increasing profits and sales as they continue to expand and invest in the future.

Hennes & Mauritz

Profits and sales should increase if they have effectively restructured and continue to focus on profitable business segments and keep inventories at levels consistent with demand. Focus on reducing inventories, restructuring, and eliminating unprofitable segments.

FINANCIAL STATEMENTS 11 References Abercrombie & Fitch. (n. d.). About Financial Statements. Abercrombie & Fitch. Retrieved 12 January 10 2011 from http://www.reuters.com/finance/stocks/companyProfile?symbol=ANF.N Abercrombie & Fitch. (n. d.). About Financial Statements. Abercrombie & Fitch. Retrieved 12 January 10 2011 from http://www.abercrombie.com/anf/investors/investorrelations.html GAAS. (n.d.). Generally Accepted Auditing Standards. Wikicfo.com. Retrieved July 25, 2011 from http://www.wikicfo.com/Wiki/Generally-Accepted-Auditing-Standards-GAAS.ashx Hennes & Mauritz. (n. d.). About Financial Statements. Hennes & Mauritz. Retrieved 12 January 10 2011 from http://about.hm.com/us/ir Hennes & Mauritz. (n. d.). About Financial Statements. Hennes & Mauritz. Retrieved 12 January 10 2011 from http://about.hm.com/fi/investorrelations/fiveyearsummary__fiveyearsummary.nhtml Hennes & Mauritz. (n. d.). About Financial Statements. Hennes & Mauritz. Retrieved 12 January 10 2011 from http://www.hoovers.com/company/HM_Hennes__Mauritz_AB/rffxfri1.html IAASB. (2011, May). International Auditing and Assurance Standards Board. Iafc.org. Retrieved July 25, 2011 from http://web.ifac.org/download/IAASB_Fact_Sheet.pdf IFRS. (n.d.). International Financial Reporting Standards. Ifrs.org. Retrieved July 25, 2011 from http://www.ifrs.org

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