Go to page 25 or 26 of the annual report to see a table of contents for notes to
ID: 2497454 • Letter: G
Question
Go to page 25 or 26 of the annual report to see a table of contents for notes to financial statements. Click on Note A - Significant Accounting Policies to answer question 1.
Describe the nature of the company’s business and company’s primary products or services.
IBM (International Business Machines) is the world's largest information technology company that provides hardware and software for a line of business servers, storage products, customer microchips, and application software. It’s also part of the Fortune 100 businesses. The company once had a revenue of 88 billion in 2000 and now currently in 2014, 4th quarter ending with revenue of 5.5 billion.
What date did IBM’s fiscal year end?
In 2013 and 2014 IBM’s fiscal year ended in Dec 31 for both years.
What method of depreciation does IBM use? (See page 88 or 89)
According to my research, I was able to identify the method of depreciation IBM used is a straight line method for both years 2013 and 3014
Check page 92 or 93 and answer the following questions:
What type of inventory does IBM have and do they use Lower of Cost or Market principle?
What are considered cash equivalents?
Refer to the Consolidated Statement of Financial Position (balance sheet) on page 80 or 81 and Consolidated Statement of Earnings and Cash Flows Statement to calculate the following ratios for 2014 and 2013: Note the amounts in financial statements are in millions.
Round ratios to 2 decimal place
2014
2013
Change
Explain what information each ratio provides
Debt ratio =
Total liabilities / Total asset
Current ratio =
Total current assets/Total current liabilities
Gross profit % = Gross profit/Total revenue
Inventory turnover = Cost of goods sold (see b) / Average merchandise inventory
Average days inventory is held =
365/inventory turnover
Cash ratio = cash & cash equivalents / Total current liabilities
Acid-test (Quick) ratio = (cash & cash equivalents + Marketable securities + net trade receivables)/ Total current liabilities
A/R turnover = Revenue from sales/Average trade accounts receivable
See a below for more information
Average collection period = 365/A/R turnover
Asset turnover = Total Revenue / Average total assets
Return on Assets =
Net income + interest expense / Average total Assets
Times interest earned ratio = (net income before income tax expense + interest expense)/interest expense
Debt to equity ratio = Total liabilities / Total Equity
Earnings per share (EPS)-Basic
For EPS # see statement of earnings
Profit margin ratio = Net income / Total revenue
a) Use Revenue from Sales for net credit sales in the formula and use only Notes and Accounts Receivable-Trade amounts. For 2014 ratio, Average A/R is calculated by dividing the sum of 2014 A/R & 2013 A/R by 2. You need to also divide the sum of 2013 & 2012 A/R by 2 for 2013 ratio.
Use Cost of sales instead of Cost of Goods Sold in the formula
6.) Compare the following ratios with industry averages. Print industry averages from Reuters.com Under news and market tab, click on stocks. Enter company’s name, choose financials option from the top options.
IBM
Industry
Difference
Acid-test (Quick) ratio
1.20
2.79
Current ratio
1.25
2.93
Debt to Equity ratio
241.65
8.03
Profit margin ratio
Receivable turnover
3.30
5.12
Inventory turnover
20.99
253.04
Asset turnover ratio
0.74
1.08
7.) Prepare a horizontal analysis (see chapter 14 for an example) for the following items in the statement of financial position using 2013 as the base year. You must use Microsoft Excel to complete this table. You can then insert the table into the word document.
Increase (Decrease)
2014
2013
$ Amount
Percent (round to 2 decimal places)
Total Cash & Cash equivalents
Total Current Assets
Net Plant, Property and Equipment
Total Assets
Total Current Liabilities
Total Liabilities
Total IBM Stockholders’ Equity
8.) Prepare a vertical analysis (see chapter 14 for an example) in relation to sales (total revenue as the denominator) for the following items in the income statement. You must use Microsoft Excel to complete this table. You can then insert the table into the word document.
2014
2013
$ Amount
Percent
$ Amount
Percent
(2 decimal places)
Total Revenue
100%
100%
Total Cost
Gross Profit
Research, Develop and Engineering
Selling, general, and Admin. Expenses
Income before income taxes
Provision for Income Taxes
Net Income
In conclusion, briefly discuss the improvement or lack thereof in financial position of the company. Use the ratio, horizontal and vertical analyses to support your opinion. If you do not support your answer with the above ratios and analyses, you will not receive credit for this question.
What did you learn from this project? Do you think it was useful?
Round ratios to 2 decimal place
2014
2013
Change
Explain what information each ratio provides
Debt ratio =
Total liabilities / Total asset
Current ratio =
Total current assets/Total current liabilities
Gross profit % = Gross profit/Total revenue
Inventory turnover = Cost of goods sold (see b) / Average merchandise inventory
Average days inventory is held =
365/inventory turnover
Cash ratio = cash & cash equivalents / Total current liabilities
Acid-test (Quick) ratio = (cash & cash equivalents + Marketable securities + net trade receivables)/ Total current liabilities
A/R turnover = Revenue from sales/Average trade accounts receivable
See a below for more information
Average collection period = 365/A/R turnover
Asset turnover = Total Revenue / Average total assets
Return on Assets =
Net income + interest expense / Average total Assets
Times interest earned ratio = (net income before income tax expense + interest expense)/interest expense
Debt to equity ratio = Total liabilities / Total Equity
Earnings per share (EPS)-Basic
For EPS # see statement of earnings
Profit margin ratio = Net income / Total revenue
Explanation / Answer
Ans) Cash equivalents include U.S. government Treasury bills, bank certificates of deposit, bankers' acceptances, corporate commercial paper and other money market instruments. They are highly liquid.
Ans ) Inventory and accounts receivable financing for dealers and remarketers of IBM and OEM products. Payment terms for inventory financing and accounts receivable financing generally range from 30 to 90 days.
Solution
Round Ratios to 2 decimal place
2014
2013
Change
What information does the ratio provide
Debt ratio = Total liabilities/Total assets
0.897
0.81
Current Ratio = Total current assets/Total current liabilities
1.25
12.7
slightly deteriorated from 2013 to 2014.
Inventory turnover = Cost of goods sold/Avg. merchandise inventory
20.99
Average day inventory is held =365/inventory turnover
17.38
Cash Ratio = cash & cash equivalents/Total current liabilities
deteriorated significantly from 2013 to 2014.
Acid test ratio = cash & cash receivables +marketable securities +net trade receivable/Total current liabilities
1.20
0.53
slightly deteriorated from 2013 to 2014.
A/R turnover = Revenue from sales/Average trade accounts receivable
See a below for more information
10.21
9.53
improved from 2013 to 2014 exceeding 2012 level
Average collection period = 365/A/R turnover
36
38
improved from 2013 to 2014 exceeding 2012 level.
Asset turnover = Total Revenue / Average total assets
0.79
0.79
Remained same
Return on Assets =
Net income + interest expense / Average total Assets
10.23
13.06
International Business Machines Corp.'s ROA deteriorated from 2012 to 2013 and from 2013 to 2014.
Times interest earned ratio = (net income before income tax expense + interest expense)/interest expense
Debt to equity ratio = Total liabilities / Total Equity
8.78
4.50
Earnings per share (EPS)-Basic
For EPS # see statement of earnings
11.97
15.06
Profit margin ratio = Net income / Total revenue
0.129
16.75
International Business Machines Corp.'s net profit margin deteriorated significantly from 2013 to 2014
Round Ratios to 2 decimal place
2014
2013
Change
What information does the ratio provide
Debt ratio = Total liabilities/Total assets
0.897
0.81
Current Ratio = Total current assets/Total current liabilities
1.25
12.7
slightly deteriorated from 2013 to 2014.
Inventory turnover = Cost of goods sold/Avg. merchandise inventory
20.99
Average day inventory is held =365/inventory turnover
17.38
Cash Ratio = cash & cash equivalents/Total current liabilities
deteriorated significantly from 2013 to 2014.
Acid test ratio = cash & cash receivables +marketable securities +net trade receivable/Total current liabilities
1.20
0.53
slightly deteriorated from 2013 to 2014.
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