Discussion Response

Posted: October 17th, 2013

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Discussion Response

Q1. Select two retailing companies in the same industry and go online to their annual report. Calculate inventory turnover, gross profit percentage, Current Ratio, Debt Ratio, for both and conclude to the class which company you feel is the stronger overall of the two and why.

Apple Corporation and BestBuy Company financial analysis for the period ended 2011(values in millions of dollars). (Bloomberg Businessweek)

Inventory turnover

Inventory turnover=sales/inventory or cost of sales /average stock

Apple Inc.:   cost of goods sold= $64,431/ average stock =$20,613 = 3.126

Best Buy:     cost of goods sold= $37,611 / average stock =$7,272 =5.172

Gross profit percentage

Gross profit percentage = sales- cost of sales/sales * 100

Apple Inc.: sales=$108,249- cost of sales=$ 64,431/ sales=$108,249 * 100 = 40.478 %

Best Buy: sales=$50,272 – cost of sales =$37,611 /sales=$ 50,272 * 100 = 25.18 %

Current ratio

Current ratio = current assets/ current liabilities

Apple Inc.: current assets = $44,988/ current liabilities =$39,576 =1.137

Best Buy: current assets = $7,905 / current liabilities = $8,663 =

Debt ratio

Debt ratio = total debt/ total assets

Apple Inc.: total debts =$ 8,107 / total assets= $116,371 =0.0697 (Apple

Best Buy: total debts = $ 501 /   total assets=$17,849 =0.028 (Bloomberg Businessweek, 48)

Apple is a stronger company because it has a greater gross profit percentage due to its high sales value. In addition, Apple has a better current ratio compared to Best Buy.

Q.2 Discuss three areas where accountants and auditors need to be aware of fraud and suggest ways how they can detect fraud and what they could suggest to management to implement in the form of internal controls to lessen the occurrence of fraud and to be able to detect it early on if it does happen.
Fraud is prevalent in any transaction that involves the movement of both cash and goods.

Sales: goods that have been sold are usually prone to fraud by the staff. Fraud occurs when the goods are taken out of the company without the verification of the goods ordered and the goods delivered by the company staff. The goods ordered quantity might differ with the quantity delivered (Millichamp, 18).The staff might issue lesser quantity to the buyer such that the remaining quantity is sold by the staff. The management of a company can prevent fraud in sales by ensuring that issuance of goods is done by a responsible official. Each transaction should be authorized by different responsible officials. Quantity of goods sold should concur with the quantity ordered by the customers (Beasley, 11).

Purchases: Collaboration between staff and the suppliers to commit fraud can result in reduced quantity of goods delivered in contrast with the quantity. Fraud in purchases can be detected by verification of the quantity delivered and the quantity ordered. Auditors can also verify the amounts purchased from inquiring the amounts from the supplier. The company can put internal control on purchases by ensuring that the quantity purchased is equal to the quantity ordered (Millichamp 28).

Cash receipts: Cash receipt is a sensitive part of the accounting section in a company. An accountant may collude with the suppliers or even the management to commit fraud. The accountant might understate the amounts received (Millichamp, 18). An overstatement of the amounts received could show that the management has increased the company’s financial position. Cash should be received by the cashier or accountant only such that he is solely responsible for any disparities in the financial records regarding cash (Beasley, 11).

Q.3 Go to Amazon.com’s financial statements. Why are capital stock and retained earnings shown separately in the shareholders’ equity section of the balance sheet? How much of Amazon’s preferred stock was outstanding in their latest annual report? How can you tell? Examine Amazon’s balance sheet. Which stockholders’ equity account increased the most during its latest year and what caused that increase? Lastly, would it be meaningful to compute Amazon’s return on equity? Explain your answer.

Share capital is divided among the shareholders according to the shares they own. Retained earnings are kept by the company and carried over to the next financial period to cater for unexpected costs or investments that the company might undertake (Libby et al, 49). Amazon had outstanding gains from currency exchange because it carries out business across the globe and deals with many currencies. Additional paid in capital resulted in higher capitalization for the company. The company had $6,999,000,000 billion additional paid in capital from new investors. This increased the demand for the stock driving up the overall price of the stock, thus higher dividends for the shareholders.

Stock holders equity= total assets – total liabilities

Shareholders equity = total assets =$25,278 – total liabilities = $17,521

=    $ 7,757

Return on shareholders equity (ROE) = Net income/shareholder’s equity

Net income = $631 / shareholder’s equity =$ 7,757 = 0.081

Computing the company’s return on equity would enable an investor to know the rate return on an investment. It enables an investor in making a judgment on whether or not to make an investment in the said company (Libby et al, 25).

Work cited

Accounting Coach LLC.Balance sheet. January 1 2012.Web.Accessed on March 1 2012 http://www.accountingcoach.com/online-accounting-course/05Xpg03.html

Beasley, Mark S. Auditing Cases: An Interactive Learning Approach. Upper Saddle River, N.J: Pearson/Prentice Hall, 2009. Print.

Bloomberg Businessweek .Amazon.com Inc (AMZN: NASDAQ GS).Financial statements .January 1 2012.Web.Accessed on March 1 2012 http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=AMZN:US&dataset=balanceSheet&period=A&currency=native

Bloomberg Businessweek. Best Buy Company Inc. (BBY: New York).Financials. January 3 2012.Web.Accessed on March 1 2012 http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=BBY:US

Gowthorpe, Catherine. Financial Analysis. Oxford: CIMA, 2008. Print

Libby, Robert, Patricia A., and Daniel G. Short. Financial Accounting. New York:      McGraw-Hill/Irwin, 2011. Print.

Millichamp, A H. Auditing. London: Continuum, 2002. Print

Morningstar Financials Apple, Inc.Financial Report.January 8 2012.Web. Accessed on March 1 2012 http://financials.morningstar.com/income-statement/is.html?t=AAPL&region=USA