Part 1: Interesting Differences Between

Part 1 There Are A Number Of Interesting Differences Between Sunbeam

Part 1 There Are A Number Of Interesting Differences Between Sunbeam

PART 1 - There are a number of interesting differences between Sunbeam's 1997 and 1996 balance sheets (e.g., receivables increased by $82 million, inventories increased by $94 million, and pre-paid expenses decreased by $23 million, while long-term productive assets and liabilities remained relatively unchanged), and between its 1997 and 1996 income statements (e.g., during 1997 the company engaged in a number of "buy and hold" transactions, gross margin increased dramatically and SG&A declined). a) (maximum 7 points out of 13) - Adjust Sunbeam's 1997 Earnings before interest and taxes for one-time events and apparent (e.g., doubtful accounts, depreciation expense and, etc.) changes in accounting policy.

You may want to compute some comparative ratios to facilitate your analysis. Be sure to provide the details of and clearly label any computations. b) (maximum 4 points out of 13) - Utilizing your adjusted numbers from 1)a. (above) re-compute Sunbeam’s operating cash flows for 1997 (i.e., compute a new cash flows amount based on your adjustments to the original data). Clearly label the components of your computations. c) (maximum 2 points out of 13) - Summarize your findings in 1)a. and 1)b. (above), paying particular attention to any evidence of fraud (be careful not to let 20-20 hindsight – i.e., information that you are aware of, but is not included in this case – influence your conclusions).

PART 2 – We discussed the four factors that Michael Porter identifies as influencing and directing competitive strategy. Required: a) (maximum 1 out of 7 points) identify each of those specific factors. b) (maximum 1 out of 7 points) provide specific examples of accounting information that might be useful for assessing each factor. Be sure to explain (briefly) how each example might be used.

Paper For Above instruction

The analysis of Sunbeam’s financial statements between 1996 and 1997 reveals notable differences that warrant a detailed adjustment process to understand true performance and potential red flags related to financial reporting practices. These discrepancies include significant shifts in receivables, inventories, and expenses, which must be scrutinized to assess underlying operational realities versus manipulated or anomalous figures.

Part 1: Adjustments to Sunbeam’s 1997 Earnings Before Interest and Taxes (EBIT)

In evaluating Sunbeam’s 1997 EBIT, the first step involves identifying and adjusting for extraordinary items and accounting policy changes. Notably, the increase in receivables by $82 million and inventories by $94 million may reflect either genuine operational growth or aggressive revenue recognition and inventory management tactics. The decrease in pre-paid expenses by $23 million could suggest expense deferral or expense recognition timing issues. Additionally, the company's engagement in "buy and hold" transactions and notable shifts in gross margin and SG&A expenses hint at possible strategic accounting choices to inflate profitability.

In practice, adjustments should account for doubtful accounts, if any, which could overstate receivables, and depreciation expenses, which might be manipulated through changes in useful life assumptions or depreciation methods. For instance, if Sunbeam accelerated depreciation for tax benefits or profitability appearance, removing such accelerated expenses would provide a clearer view of operational earnings.

Computationally, adjustments to EBIT could include adding back excess depreciation or amortization resulting from policy changes, and removing non-recurring gains or losses depicted in operating expenses. For example, if depreciation expense in 1997 was artificially reduced through policy changes, this would inflate EBIT. The net adjustment is calculated by analyzing notes to the financial statements for depreciation method changes and extraordinary items, then adjusting EBIT accordingly.

Part 2: Recomputing Operating Cash Flows

After making the necessary adjustments to EBIT, the next step involves recalculating operating cash flows. This process entails adjusting net income for non-cash expenses such as depreciation and amortization, and changes in working capital components—receivables, inventories, and pre-paid expenses. For Sunbeam, the increase in receivables and inventories suggests higher working capital investments, which should reduce cash flows. Conversely, if adjustments reveal that some expenses were deferred or exaggerated, the true cash generated from operations might be higher than reported.

Specifically, the revised operating cash flow can be computed as follows: starting with adjusted net income, add back depreciation (adjusted for any policy changes), account for working capital changes—subtracting increases in receivables and inventories—and adding back any non-cash expenses. Each component must be clearly labeled. For example, if the adjusted net income is $X million, with depreciation of $Y million, receivables increasing by $82 million, inventory increasing by $94 million, and pre-paid expenses decreasing by $23 million, the cash flow calculation would be structured to reflect these adjustments accurately.

Part 3: Summary of Findings and Potential Fraud Indicators

In summarizing the analysis, adjusted EBIT and operating cash flows suggest insights into Sunbeam’s true operational health. If significant adjustments are required—such as eliminating inflated revenue recognition or non-recurring items—it may indicate aggressive accounting practices aimed at exaggerating performance. Evidence of potential fraud could include unusual increases in receivables and inventories not supported by sales growth, discrepancies in depreciation expenses, or inconsistent disclosures about accounting policy changes.

However, without hindsight or extraneous information not present in the case, conclusions about fraud should remain cautious. The key is identifying whether accounting choices and financial statement inconsistencies align with typical red flags without jumping to definitive judgments.

Part 4: Porter's Four Factors Affecting Competitive Strategy

Michael Porter's framework emphasizes four critical factors influencing strategic positioning: the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, and industry rivalry.

• Threat of New Entrants: Economies of scale, capital requirements, and access to distribution channels influence barriers to entry. For instance, high capital expenditures and branding power can serve as protective barriers.
• Supplier Power: A supplier with differentiated products or limited substitutes can exert pricing power. For example, proprietary components or patents increase supplier leverage.
• Buyer Power: Buyers' bargaining strength stems from purchase volume, switching costs, and product differentiation. Large retail chains demanding better terms exemplify buyer power.
• Industry Rivalry: Intensity of competition depends on factors like product differentiation, industry growth, and exit barriers. Highly competitive sectors show frequent price wars and innovation races.

In assessing these factors via accounting information:

• For threat of new entrants, analyzing capital expenditure trends and R&D costs indicates entry barriers.
• For supplier power, examining cost of inputs, supplier concentration, and dependency ratios provides insights.
• For buyer power, reviewing revenue concentration, discounts, and returns enable understanding of bargaining leverage.
• For industry rivalry, evaluating profit margins, pricing strategies, and expense management reveals competitive dynamics.

Thus, accounting data such as expense ratios, profit margins, capital investments, and revenue breakdowns help in assessing each of Porter's strategic factors effectively.

References

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• Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press.
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