Financial Statements Declared by Ford Company - a Case Study
Essay by Kill009 • August 6, 2011 • Case Study • 1,530 Words (7 Pages) • 3,250 Views
Essay Preview: Financial Statements Declared by Ford Company - a Case Study
Date: 07.08.2011
Problem 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 & Poor's lowered the company's long-term debt ration from BBB+ to BBB with a negative outlook.
Questions
1. Do you agree with the conclusion that "a meaningful amount of Ford's earning improvement over the past three quarters come from accounting adjustments, as opposed to real improvements in the company's underlying profitability?"
Yes, we agree that a meaningful amount of Ford's earning improvement over the past three quarters come from accounting adjustments, as opposed to real improvements in the company's underlying profitability.
Change in accounting principle are allowed only if
Required by new GAAP
Use 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.
2003 2002
Cumulative Effect of change in accounting principle -264 -1002
*All figures in millions
Previously company's profit underlie in provision for credit and losses.
2003 2002
Provision for credit and insurance losses 1802 2523
Percentage of sales 1.83% 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 below
Accounting principle Before FIN6
Year 2002 2003
Income / loss from continuing operations $295 $1561
Income / ( loss ) from discontinued / held for sale operations $48 $4
Loss on disposal of continued / held for sale operations $95 $5
Cumulative effect of change in accounting principle $264
Profit $152 $1288
*All figures in millions
Here 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.
2. 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?
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 revenue
Automotive sales 98719
Financial services 19727
Total sales and revenue 118446
Automotive interest income 727
Cost and expenses
Cost of sales 91205
Selling administrative and other expenses 18027
Interest expense 5709
Provision for credit and insurance losses 1802
Total Cost and expenses 116743
automotive equity in net income / loss of affiliated companies
Income loss before income taxes 48
Provision for/ benefit from income taxes 2478
Income loss before minority interest 245
Minority interest in income loss of subsidiaries
Income / loss from continuing operations 1561
Income / ( loss ) from discontinued / held for sale operations
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