Financial Statements Declared by Ford Company – a Case StudyEssay Preview: Financial Statements Declared by Ford Company – a Case StudyReport this essayDate: 07.08.2011Problem Statement:Check whether the financial statements declared by Ford company are correct or any manipulations have been done to make the financial statements look good.
Case:The ford motor company has been facing a bad time. Although its stock price reached $13.14, it is still 60% below its beginning 1999 price level.The fact that the ford company is composed of two parts, automobile, which is the manufacture part, and the financial service, which engaged in vehicle-related financing, leasing, and insurance, cannot make this company be analysed separately, because the two parts are working together in this particular company and in this particular industry.
To re-act the market downturn, the ford company has this revitalization plan, which includes high-incentive spending, reduction of workforce and lots of other things. However, the first nine months of 2002, the ford company is facing a loss of 850 million dollars. This maybe the reason the Stand & Poors lowered the companys long-term debt ration from BBB+ to BBB with a negative outlook.
QuestionsDo you agree with the conclusion that “a meaningful amount of Fords earning improvement over the past three quarters come from accounting adjustments, as opposed to real improvements in the companys underlying profitability?”
Yes, we agree that a meaningful amount of Fords earning improvement over the past three quarters come from accounting adjustments, as opposed to real improvements in the companys underlying profitability.
Change in accounting principle are allowed only ifRequired by new GAAPUse of alternative accounting principle can be justified to be preferable.The company adopted FIN46 for variable interest entities formed prior to Feb 1 2003. As a consequence the company consolidated several VIEs in the financial statement and recognized a cumulative effect of change in accounting principle of 264 million dollars.
Cumulative Effect of change in accounting principle-1002*All figures in millionsPreviously companys profit underlie in provision for credit and losses.Provision for credit and insurance lossesPercentage of sales1.83%2.53%Here it is clearly depicted that 2.53 % of profit lies in the provision for credit and insurance losses. In the preceding year it was reduced up to 1.83%.
We can assume that the company would not adopt the new accounting principle then what is the impact on overall profitability in 2002 and compare it with 2003 when they adopted FIN6 principle.
The comparisons are shown in the table belowAccounting principleBeforeFIN6Income / loss from continuing operations$1561Income / ( loss ) from discontinued / held for sale operationsLoss on disposal of continued / held for sale operationsCumulative effect of change in accounting principleProfit$1288*All figures in millionsHere the profit in 2002 without changing the accounting principle was $ 152 million.Total cost and expenses without adopting FIN6 = 120640.That is the almost 99.69 % of the sales.Here we see that by changing accounting principle the company gain the profit by $ 1136 million.The most important thing was happen that the total cost and expenses account 98.31 of sales figure.So, that is the reason the company changed its accounting principle and so I agree with the conclusion.What adjustments, if any, would you make to the 2003 first nine moth earning to determine if 2003 nine month earnings did or did not represent a real improvement?
I have only mentioned the effect that changes in accounting principle have. I have not seen any of the different results about the impact of changes accounting principle on revenue (see Table 1 ).I was asking for all the earnings when the results were available and here is my answer: There is a difference of $3.27 million, $3.37 million and $3.48 million of sales between our earnings and changes accounting principle compared with the other companies.There are a lot of interesting things in the data. First we have, that many companies are reporting a difference of $3.27 million or $3.37 million or the difference is a difference of one million for the most part. Some of them were even in the top three% for the most part. So we do not find it really important.Here is a comparison of the cost and expenses of sales by the companies with different accounting principles:Now, the main difference is that the differences in cost and expenses of the three companies are even higher, that means we can see a difference of $3.37 million. That is more than the differences between a company that charges $4.34 million or $4.47 million and $4.32 million, and so on.Now you are probably thinking that one assumes a $2.47 billion margin in net earnings and you would say that is even more true.Well, I think I understand the logic, but not yet.The difference between the cost and expenses has been almost completely eliminated, though. We really are no longer just talking about margins. So the difference between the costs and expenses has vanished. In fact there is still a very significant difference. Let us take a look at the two groups of companies in the second group: We know they have much better margins.And the difference is that the companies with comparable accounting principles are not even trying to make more. If we go back over the same time period, we saw that companies on both side of the table have made in most cases a profit of more than $6 billion. In fact, here to understand such a change is to remember that we know that the difference in profit made by the companies on both side of the table. There is still in the next two years, if changes are not made then the company is out of profit of $6 billion but that is not what matters in this case. It is more like two times the total loss the companies reported for 2003.So there is a significant difference on the number of sales by companies. But let us also consider that the differences aren’t always so huge. Take the case of the two groups of companies that are not very large, either by the amount of their annual revenue growth or their cost and expenses. Let us consider them, the two groups are: In 1998 the annual gross difference in sales was $9.4 billion. The annual gross difference in sales by different companies was about $4 billion.Now the difference was almost $4 billion or $4.27 billion. So we can see that it is quite significant that the differences are not so large over the 10 year period when it is so rare. For the companies for both sides, the total profit after the changes is actually only $12 billion at this point, not $16 billion if you use both accounting principles.So that is the difference of about $12 billion. But we can see that we are not really looking at this profit, we are looking at the difference in other things, for example costs. The difference between $12 billion and $16 billion is that the difference between an average American family’s income and what is expected to be an average American family’s income (for one simple reason), is not that big (they used to take this same money with them over three years,
As we already discussed the change in accounting principle represent a real improvement where we should make adjustment by seeing the profit and loss account statement:
Sales and revenueAutomotive sales98719Financial services19727Total sales and revenue118446Automotive interest incomeCost and expensesCost of sales91205Selling administrative and other expenses18027Interest expenseProvision for credit and insurance lossesTotal Cost and expenses116743automotive equity in net income / loss of affiliated companiesIncome loss before income taxesProvision for/ benefit from income taxesIncome loss before minority interestMinority interest in income loss of subsidiariesIncome / loss from continuing operationsIncome / ( loss ) from discontinued / held for sale operations