Week 2 Discussion: Balance Sheet Analysis

Week 2 Discussioncollapsebalance Sheet Analysisthe Discussion Question

Balance Sheet Analysis The discussion questions for Weeks 2 – 4 are designed to help teach you to derive meaning from financial statements. Each week you will select a line item and use Variance Trend Analysis to make some initial assessments about how the company is performing. Collectively, as a class we will seek to find the “story behind the numbers.” Let’s start applying what you have learned to a real-life Balance Sheet. Locate and post a screen shot of a Balance Sheet from the investor relations section of the website from the latest fiscal year for one of the following companies: FedEx, Target.

Pick a Balance Sheet line item from the following list: Accounts Receivable, Inventory, Property, Plant, and Equipment (PP&E), Accounts Payable, Long-Term Debt, Total Equity, Retained Earnings.

What does this line item measure and why is it important for management to understand this number?

From the Balance Sheet, identify the Current Year and the Previous Year closing amounts for your line item. Share these with the class using a data table similar to the below:

Jack’s Toy Shop (In thousands)

Inventory $336.2 $304.5

Answer the following questions:

Has the amount for the line item increased or decreased, and by how much (dollar and/or percentage)?

Is this a “good” thing or a “bad” thing for this company?

What might this mean for the organization?

What might management do to improve this line item?

Paper For Above instruction

This discussion focuses on the analysis of a selected line item from a company's balance sheet, emphasizing the importance of understanding this item and its implications for management decisions. By analyzing real financial data from a publicly traded company, students learn to interpret trends, assess the company's financial health, and consider strategic actions to enhance performance.

To begin, students select a company—such as FedEx or Target—and locate the latest fiscal year's balance sheet through the company's investor relations website. From this balance sheet, they choose one specific line item, such as Accounts Receivable, Inventory, PP&E, Accounts Payable, Long-Term Debt, Total Equity, or Retained Earnings. They then identify the closing balances for the current and previous years and present these in a comparative data table.

The next step involves analyzing whether the chosen line item has increased or decreased over the period and calculating the dollar amount or percentage change. Students interpret whether this change is beneficial or detrimental to the company’s overall financial condition. This analysis encourages critical thinking about what the change signifies—such as improved cash collections, increased inventory levels, or rising debt—and how it might reflect the company's operational efficiency, liquidity, or leverage.

Furthermore, students discuss the potential implications for management, including strategic decisions they could make to improve or stabilize this line item. For example, if inventory has grown significantly, management might look into optimizing inventory turnover or supply chain efficiencies. Conversely, if accounts payable has decreased, it could indicate improved vendor relations or faster payments, which might affect cash flow planning.

Overall, this exercise aims to develop foundational skills in financial statement analysis, emphasizing how quantitative data can tell the story of a company's operational and financial health. It also promotes critical evaluation of management strategies and their effectiveness in influencing key balance sheet metrics.

References

  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Cengage Learning.
  • Gibson, C. H. (2018). Financial Reporting and Analysis. Cengage Learning.
  • Higgins, R. C. (2018). Analysis for Financial Management. McGraw-Hill Education.
  • Palepu, K. G., Healy, P. M., & Peek, E. (2019). Business Analysis & Valuation: Using Financial Statements, Text and Cases. Cengage Learning.
  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2016). Corporate Finance. McGraw-Hill Education.
  • Weil, R. L., Schipper, K., & Francis, J. (2019). Financial Statement Analysis. Cambridge University Press.
  • White, G. I., Sondhi, A. C., & Fried, D. (2018). The Analysis and Use of Financial Statements. John Wiley & Sons.
  • Penman, S. H. (2019). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.
  • Stickney, C. P., Brown, P., & Wahlen, J. M. (2018). Financial Reporting, Financial Statement Analysis, and Valuation. Cengage Learning.
  • White, G. I., Sondhi, A. C., & Fried, D. (2018). The Analysis and Use of Financial Statements. Wiley.

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