Post 6: Assets and Working Capital – Examine each of the major assets and working capital accounts. How does your firm account for each of these items and does the accounting method differ from the firm’s competitors. Examine the firm’s receivables. Is there any evidence of aggressive revenue recognition or earnings management through manipulation of the allowance for doubtful accounts? Examine the firm’s inventory methods and policies and compare to their competition. If the firm uses a different inventory accounting method (e.g., FIFO versus LIFO) than its competitors, calculate the impact on net earnings. Is there any evidence of excess or obsolete inventory? Examine the firm’s accounts payable. Is the firm paying within a reasonable time? How does this compare to the firm’s competition? Calculate asset management / efficiency ratios for the past five years for your company and its selected competitors including A/R turnover in days, Inventory turnover in days, A/P turnover in days, the cash collection cycle in days. Calculate and interpret liquidity ratios including the current ratio, quick ratio and cash ratio. Examine the firm’s fixed assets and related accounting policies including depreciation period and method. Examine the firm’s intangible assets. Look at the footnotes for evidence of impairments.
Post 7: Liabilities and Off-Balance Sheet Financing – Examine the firm’s use of leverage and compare its use of leverage with its competitors. Compute leverage ratios and coverage ratios. Make a judgment about the firm’s financial risk compared to its competition. Does the firm utilize off-balance sheet financing? If so, estimate the value of this off-balance sheet financing and prepare a revised balance sheet recognizing this debt. Calculate the impact of this off-balance sheet debt on the leverage ratios and on your overall assessment of the firm’s financial risk. Does the firm have any pension obligations? Is any portion of these obligations unfunded?
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