As a manager, you want to see how your company is performing. Although there are ratios pertaining to inventory and receivables that can tell you in different ways how efficient your company is, liquidity ratios tell you the company's "ability to meet its short-term financial obligations" (Investopedia, XXXXXXXXXXThese ratios measure if the company has the ability to pay off its short-term debt obligations. The ratios I would use to do so as a manager would be to calculate the company's current ratio, quick ratio, inventory turnover ratio, and days sales outstanding. The current ratio shows if the company is able to cover its short-term liabilities with its current assets. The quick ratio, also known as the acid-test ratio, is "an indicator of a company's short-term liquidity, and measures a company's ability to meet its short-term obligations with its most liquid assets" (Investopedia, XXXXXXXXXXEA has not recorded any inventories since 2015, so in this comparison, there is no inventory being recorded. However, Activision reports very low inventory in these years. As we can see from the current ratios of 2016 and 2017, both companies have a current ratio significantly over 1.0, showing that they are able to cover any short-term debt or obligations they have. EA increased their current ratio from 1.80 in 2016 to 2.15 in 2017. By looking at their balance sheet for these two years, this increase is due to an increase in their current assets, since their current liabilities had very little change throughout the year. However, if we look at the current ratio for Activision, we can see that it decreased from 2016 to 2017. The quick ratios for 2016 and 2017 show about the same information. As a manager, you would want to know that this is a sign that your company’s liquidity is changing, for the better in EA’s case, or for the worse, in Activision’s case.
For an investor, they should take a look at the current ratio, quick ratio, and also the debt to equity ratio. Which the current ratio and quick ratio can be used to see if the company is able to cover their short-term debt and obligations, these ratios do not show everything that is necessary for an investor to know about the company. While having a ratio over 1.0 will show that the company is able to fully cover their short-term liabilities with their current assets, investors should look closer into what type of assets those are. It is important for investors to know what types of current assets the company has and how quickly they can be liquidated. If the company has inventory, which Activision has reported for the years that are being compared, investors should look into how quickly this inventory could be liquidated if needed. While both these companies show a current ratio over 1.0, showing they can cover current liabilities, it is very unlikely that a company would be able to liquidate all current assets and remain in good standing unless their current ratio and quick ratios were higher than 1.0. Even though both companies have higher than 1.0 in both years for both the current and quick ratios, investors should still know that liquidating all current assets is just not a plausible thing for any company to do and should look into how they would go about covering current liabilities since this is a very unlikely possibility. The debt to equity ratio shows investors the company’s financial leverage and is often referred to as a risk ratio. This ratio “indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity” (Investopedia, XXXXXXXXXXUnlike the first two ratios, the higher the debt to equity ratio, the most risk or more aggressive a company has been leveraging various projects with debt in an attempt to increase their value. An investor, depending on how they choose to invest, could view this as a lucrative opportunity if the company has done well while taking more risks in this way, or they could view this as too much of a risk for them. While they do not want to see a high ratio, they also do not want to see a very low one either, because that means the company is not taking advantage of the financial leverage and in essence, is not making them the maximum amount of return for their money. Comparing these two companies, we see that Activision would be more of a risk for an investor than EA. EA has actually decreased their debt to equity ratio from 2016 to 2017, while Activision’s debt to equity ratio has increased.
Creditorsdiffer from investors although they will be looking at many of the same liquidity ratios as investors would. Creditors do not make money or benefit from lending money to companies as investors do, rather they make their money from the interest that is accrued on the amount they lend companies. They will use the financial reports and evaluate a company’s liquidity ratios to see if the company has enough funding to meet their short and long term obligations or debt, which can be looked at as their credit check to see if they are in a position to make payments to creditors on time. The ratios that they are looking closely to would be the debt-equity ratio, quick ratio, cash ratio, and current ratio. The current ratio and quick ratio will show the creditors what type of financial health the company is in and if they are able to cover their short-term liabilities. As we see, both EA and Activision have current and quick ratios over 1.0, so they are able to cover their short-term liabilities. They will also look at their debt to equity ratio, which is a very important ratio for creditors. This ratio shows if the company is able to repay its obligations. Seeing that they are lending the money to the company, the company should be in good standing and be able to pay back these obligations to show the creditors they are fit for a loan from them. For this ratio, the creditors will see that if the ratio is increasing, as Activision shows theirs is from 2016 to 2017, they are being financed more by creditors rather than their own financial sources. This can be seen as a risk by the creditors since a lower ratio would show that the company is financing itself rather than needing money from outside creditors and if the company happens to have a decline in business, it does not put the creditor in is much risk if they are able to finance themselves. While a creditor does not want to see a high ratio, they also do not want to see a very low one either, this will show that the company is not taking advantage of the financial leverage the company has in the increase or growth of business. The cash ratio is also very important for creditors to evaluate. This ratio “compares a company’s most liquid assets to its current liabilities” (Bragg, XXXXXXXXXXThis ratio does not take into account inventory, which EA did not report for these two year, and accounts receivable. Although accounts receivable is considered current assets, this ratio does not incorporate those, which is why this is the most conservative liquidity ratio. As we can see from the comparison, EA had a significantly lower cash ratio in 2016 than their 2017 number, but also significantly lower than Activision in 2016. However, EA did still have a cash ratio over 1.0, which means they were still able to cover their current liabilities. In 2017, there was a significant increase in EA’s cash ratio, as Activision’s stayed about the same.
As a manager, you focus on the efficiency and performance of your company. The management of the company need to make sure they are paying close attention to their debt ratios, as these show how many the company owes in obligations and if they fail to pay these, it could result in bankruptcy. Management should pay attention to the debt ratio of the company to make sure it is remaining low in order to make sure they are not over using this leverage to fund their projects. When looking at the debt ratio for these companies, we see that EA has decreased their debt ratio from 0.52 to 0.47 from 2016 to 2017. This shows that their financial equity within this year. The debt ratio for Activision went from 0.48 in 2016 to 0.49 in 2017. This means that the company had a slight increase in the amount of their debt. These ratios show that both companies have just about 50% of their projects leveraged by their debts, but neither is significantly lower or higher than the other in this ratio. Management should also analyze other ratios that have information not shown on the financial statements. Operating expenses is a way for a management to improve their financial position, but all this information is not always provided on published financial statements. Management should look at the company’s cash flow to debt ratio, which will compare the company’s cash generated to the amount of debt they have. Showing how much of their debt a company can over with the cash flow of that period will show management what type of financial health the company is in, so the higher the ratio, the better position the company is in. Lastly, using operating expenses and income, management should look at the company’s interest coverage ratio to see if the company can cover their interest expenses with their earnings in that period.
Investorsshould look at both operational and debt when considering the company’s debt. The first ratio that investors should look at is the debt ratio. This ratio will show them what type of leverage is being used by the company. Investors should look for a low debt ratio, which will tell them that the company is in a stronger position of equity and uses less debt to fund their projects. Seeing that EA decreased their debt ratio from 0.52 to 0.47 from 2017 to 2016 and Activision’s debt ratio went from 0.48 in 2016 to 0.49 in 2017, investors would see that both companies are about 50% funded by their debts. Since they are so close to each other in this analysis, investors would see that these companies are using their leverage in order to make profit, which is something investors should be very interested in. Investors should also look at a company’s debt-to-equity ratio to see how much of the company’s assets are financed by shareholders and how much is financed by debt. When you are an investor in a company, you are essentially a shareholder, so this will be important to you. Whether you are looking for a financial return as an investor, or shares of the company as a shareholder, this ratio should be thoroughly analyzed. As we can see by these ratios, EA has a lower debt-to-equity ratio in 2017 than in 2016, which makes it less of a risk to invest in their company. It shows they are able to take risks to increase their value, but they are still able to increase the return for investors and shareholders. Activision’s debt-to-equity ratio has increased from 2016 to 2017, and while it is not a significant increase, it is higher than EA. This could be appealing to some investors that are willing to take larger risks to gain a bigger reward. Also, investors should look at a company’s cash flow to debt ratio. This will show them if a company is in a position to cover their debt with the current periods cash flow. While this information is not always provided on the financial statements, this is something investors should be interested in. Not only should investors be interested if a company can make money, but they should be interested in if they are able to cover their debt with the cash they have in that period in order to assure they will be paid their dividends.
Creditors need to pay close attention to the debt of companies when they are considering loaning or extending credit to companies. Unlike the external debt a company has, such as the obligations they have to creditors, investors should consider the fact that there is no interest attached to long-term operational liabilities and these also do not have fixed payments attached. This is an important factor for creditors to keep in mind when looking at the debt ratio. As they would see, EA has decreased their debt ratio from 0.52 in 2016 to 0.47 in 2017 and Activision’s debt ratio increased from 0.48 in 2016 to 0.49 in 2017. While both are still relatively small changes, creditors will notice that one company’s financial equity is increased. They would see that EA has made a decrease in their debt ratio and shows the investors that they are able to pay off their obligations and fund more of their projects from the company’s assets. This would be a good sign for investors, as they would know there is a higher possibility that they can repay their obligations to them. Creditors should pay attention to the debt-to-equity ratio to see if the company can cover their obligations. Creditors will be very interested in this because they will be the one the company has to pay back, so knowing that they are able to do so is very important. EA has improved their ability to finance their company through their own assets rather than borrowing and Activision has not had a strong a year in this aspect. While the changes within the companies are not significant, the difference between the companies show that it would be riskier to lend to Activision due to the fact that comparatively speaking, they are riskier to lend to because it is possible that if something happened to the business, they would not be as able to cover the costs as EA would be. Creditors should also take interest in the company’s cash flow to debt ratio. If the company is able to cover their debts with that periods cash flow, it shows the creditors that they are stable enough make their obligations, which would be the payments and obligations with the creditors.
As a manager there are many profitability ratios that are important to look at, as management needs to understand how the company is or isn’t making profit and what there is that can be improved upon in order to improve performance. The first would be the gross profit margin. For management, this can show how much the company can mark up their prices above the cost of goods sold. Having a higher gross margin shows that the company is efficient and about to cover expenses such as operating costs, dividends and depreciation. Next would be their operating margin. Covering operating expenses and still have profit left is very important for a company in order to remain profitable in the future. This is a good measurement of the company’s management because it can show how well the management is doing to make the company profitable over its operating costs. Showing a higher operating margin, shows how well the company would do with their current obligations, or if the economy slows down, and if they are able to afford to lower prices in order to gain business from competitors. Next would be the company’s net profit margin, which is essentially the company’s bottom line. Cost increases in COGs, operating and non-operating expenses, and taxes could shrink the net profit margin and is something management would need to be aware of. A company’s cash flow margin is also very important for management to be aware of. The cash flow compares the cash flow from operating activities and sales and the company’s ability to convert sales into cash. Management needs to manage cash flow in order for the company to be successful because they need to make sure the company had enough cash to avoid late payments or incur extra interest. Being able to have a good cash flow allows the company to have the opportunity to grow and make more profit. Return on assets is another “indicator of how profitable a company is relative to its total assets” (Investopedia, XXXXXXXXXXIt shows how efficient management is using the company’s assets to generate profit. Return on equity is also another important measure of the company’s financial performance. One of the most important ratios for management to be aware of is the overhead ratio which is “a metric that allows companies to evaluate expenses as a percentage of income” (Investopedia, XXXXXXXXXXThe overhead ratio is something that management can improve upon by being able to cut operating expenses which would have a positive effect on the company. Management must be able to reduce these operating expenses while maintaining the quality of the good or service, as well as the quality of their business. Being able to understand the overhead costs such as maintenance, advertising, rent, utilities, depreciation, and office expenses, as well as others, management will be able to manage the revenue being generated by the company. As we can see from each of these that are calculated, EA has improved their financial position from 2016 to 2017. The slight change in EA’s net profit margin is one place they could improve upon. Although it is only a slight decrease, it does show that there could be some cost increases that have decreased their net profit. On the other hand, Activision has decreased their financial health between these same years. They have had a significant decrease in all areas and comparing them to EA shows that they are not in nearly as good a financial place as they are.
Investorswould be interested in looking at a lot of the same profitability ratios as management. Looking at the company’s gross margin will show them how efficient they are in covering costs, including dividends, which is important to investors that are expecting a return. The company’s net profit margin is also important for investors to look at, as they want to see the company’s earnings after taxes. The net profit margin takes everything into account and can potentially be harder for investors to compare companies because each company will have different type of expenses. Cash flow is very important to investors as well, as the cash that the company generates also generates money for them. Return on assets will show investors how well a company can generate profit from their assets. The lower the margin is here, the more investments they will need to purchase more assets, which would be a drawback for some investors as it could indicate they are less dependent on their assets to generate revenue and more dependent on others’ investing in the company. Earnings before interest, taxes, depreciation, and amortization shows how a company does before it pays its debts. This ratio will show investors how the company is generating income before paying any debts, but it does show higher profit than just operating profits. While this does show potential for the future of the company for investors, they do have to keep in mind, this is before any debts are paid. Return on equity is very important for investors to analyze as it will help develop “future estimates of a stock’s growth rate and the growth rate of its dividends” (Investopedia, XXXXXXXXXXThis will show investors if the future of the company’s stock is risky or not. If the stock is growing slower than a rate that is sustainable by the company, the market could be discounting it because of some type of risk. A high ROE is risky for investors as well. Having an extremely high ROE could be risky due to a small equity account compared to the net income of the company. Looking at these profitability ratios between EA and Activision from an investors standpoint would show that Activision would be the less profitable and riskier decision to make. Even withint he same industry, investors will want to take a close look at the dividends that are paid out because the company's ROE might be appealing, but they need to compare the dividends paid or this comparison might be misleading. Their cash flow is decreasing, ROE is significantly decreasing, and their profit margin is almost obsolete. However, it does show that their EBITDA is higher than EA, this does not mean that Activision is doing better financially, as this is their profit before paying any debts.
Creditorswill want to take a look at the same profitability ratios as investors. While the most important ones and ones that will weight more heavily on their decisions will be different between the two, they will look at the gross profit margin, EBITDA, net profit margin, cash flow, return on assets, and return on equity. When creditors look at these ratios, they will want to make sure the company can cover its’ debts and obligations, as they are evaluating these financials to see if they will be extending credit to the company. Having a high gross margin will show that the company can cover expenses and as we can see EA is improving their ability to do so. While Activision’s financial position did not decline in this aspect, it is still lower than the competitors. The EBITDA shows that both companies are profitable before any debts are paid and would look like Activision is doing better, however, look at the EBITDA and net profit margin together, a creditor would see that Activision is really struggling to generate earnings after taxes. Although EA did have a slight decrease in their net profit margin, they did increase their EBITDA. Along with these, creditors should also look at the company’s ROA to see how well they are generating after-tax profit. The most assets the company has, the more they should be able to generate. While there are other industries that depend more on their assets than these companies, this ratio does show that Activision is struggling to generate profit from their company’s assets meaning they will need more investments to continue to generate profit and also purchase more assets. Analyzing the companies’ cash flow is very important for creditors. This is very important because it will show the company’s profitability, efficiency, and earnings quality within this period. This will show the creditors how and if the company is able to pay their required expenses with the cash generated from sales. Looking at both companies’ cash flow, we immediately see that EA has and increase from 2016 to 2017 and Activision has a decrease. Having a higher cash flow or increasing cash flow, as EA shows from 2016 to 2017, shows that they are generating enough to pay their obligations and still increasing their profits. EA is continuing to increase their cash flow and show their financial position is only growing stronger, while Activision’s cash flow has decreased showing they are not generating as much from 2016 to 2017 and also are not able to measure up to EA in this area. While this does not mean the company is not able to generate cash, they are just not showing that they are able to make as much profit after covering their expenses and obligations.
ManagerWhile these ratios mainly focused on investing and how to make money from your investments, which is not how management would necessarily be thinking, these are still very important for management to be aware of. Being aware of how these ratios are changing and compare to others in the same industry makes sure the company stays on top and continues to grow and improve. The price to earnings ratio shows the amount that must be invested in order to receive $1 of earnings. This ratio would tell management, not only the amount they can expect to receive for each $1 the investor would earn, but also, if the amount is significantly higher than competitors, management would be aware that it is less likely to rely on future high investments. The price to sales ratio will tell management how well they are doing in sales and how appealing it is for investors. The lower the ratio, the lower amount of sales they have to reach in order for their investors to make money. Having a lower ratio will be more attractive to investors. Next, management could look at the price to book ratio, which will show them the value that the market gives their company’s equity. The higher the ratio, the better the company is looking to potential investors. The dividend yield and payout ratio also allows management to illustrate to their shareholders how well the company is doing. Newer companies usually choose to reinvest their earnings back into their company in order for their company to grow. Dividends being paid out to their shareholders show them that the company is doing well and they are stable. This is a good sign for management to continue with the decisions they are making and they can also use this to attract more investors. As the management could see from all the above computed ratios, when being compared to their biggest competitor, they are in a better position financially.
InvestorThese are the most important ratios for investors to evaluate before they make decisions on investing in a company. The price to earnings ratio is “the ratio for valuing a company that measures its current share price relative to its per-share earnings” (Investopedia, XXXXXXXXXXThis ratio will tell investors how much they must invest in order to earn $1 from that investment. The lower the ratio, the less the investor must put in to receive a return. As we can see from the calculation, EA was around 50% less expensive as an investment than Activision would have been in 2016. If we then look at the 2017 calculation, we can see that EA is about 1/6 as costly to invest in and receive a return as Activision. Although both companies have had their price to earnings ratio increase in this time period, the increase in cost for investors was significantly more for Activision. Next, investors can look at the price to sales ratio. This ratio will show investors how much the company has to generate in sales in order for an investor to have earnings. The price to book ratio “reflects the value that market participants attach to a company’s equity relative to its book value of equity” (Investopedia, XXXXXXXXXXThis ratio is an indication for investors as to how the company’s future cash flow will be. Again, as we can see here, EA is in a better standing in the market than Activision. The PEG ratio is also another ratio that can be used alongside the previous ratios to evaluate the company. Although this ratio is harder to calculate because it uses a growth rate that has to be estimated, it is something that can be done by looking further into the companies. Dividend yield and dividend payout ratio are two very important ratios for investors to evaluate. Although any dividends should be more attractive to investors, this isn’t always the case. Companies choose to reinvest in themselves in order to growth and develop more within the company. These ratios were not calculated above for these companies for a few reasons. Activision has had negative dividends within these years, which would automatically raise a red flag to investors. Also, EA did not issue any dividends to their shareholders. Again, because companies did not issue any dividends to their shareholders does not mean the company is doing worse, investors should look deeper into where the companies earnings were spent.
Creditorslook at financial ratios in order to evaluate companies and understand their financial position to see if they could potentially be a lender for them. Analyzing the company to know what type of position they are in helps the creditors decide to extend their lending to the company. The price to earnings ratio shows the amount that must be invested in order to receive $1 of earnings. Creditors could look at this ratio and if the company is higher than other competitors in the same industry, it would tell them that the company is likely to have future high earnings and not have to rely on investments. This is very important for creditors to know because it will show that the company is generating enough revenue to cover their obligations. Creditors will look at the price to sales ratio and use it in the same way they use the price to earnings ratio. By having a lower ratio, the company would be more attractive to investors, meaning the company will be in a good financial position, which is attractive for creditors. The next ratio creditors could use would be the price to book ratio, which is another ratio that could show creditors how the company stacks up against the competition. Using these three ratios to compare to other companies within the same industry, creditors can see how the company is doing against competitors. Knowing that the company ranks higher against competitors makes the decision for creditors easier, as they can see how well the company is doing. The dividend yield and dividend payout ratio, along with the above ratios, would help creditors further evaluate a company’s financial position. Seeing that a company pays out dividends will, again, show the creditors the company is in a strong financial position. Even if companies do not pay out dividends, it does not mean they are not in a strong financial position. Some companies choose to reinvest in their company in order to grow and generate more earnings for the company.
Managersfocus on understanding how well their company is doing. It is most important for them to see how efficient their company is running, and these ratios will help them understand the liquidity of their short-term assets and short-term debt paying ability. Short term assets are held “for a year or less, and accountants use the term ‘current’ to refer to an asset expected to be converted into cash in the next year or a liability coming due in the next year” (Investopedia, XXXXXXXXXXAs the liquidity ratios, such as the current ratio which is the working capital, quick ratio, and cash ratio, would show, the liquidity of a company would show if a company is able to cover their short-term liabilities with their short-term assets. The current ratio shows if the company is able to cover its short-term liabilities with its current assets. The quick ratio, also known as the acid-test ratio, is "an indicator of a company's short-term liquidity, and measures a company's ability to meet its short-term obligations with its most liquid assets" (Investopedia, XXXXXXXXXXBoth companies show a positive working capital. It shows they are both able to generate enough with their operations to cover their short-term debt with their current assets.
Investorswould be interested in what is going to make them money and how the company handles their money in order to generate more revenue. Financial liquidity of a company’s assets is something that is very important for investors because it will tell them how fast they will be able to convert their investment into cash, if they want or need to. One of the ratios investors can use to see how companies can pay their short-term debt and how liquid the company is, is the current ratio. The current ratio “measures a company’s ability to pay short-term and long-term obligations” (Investopedia, XXXXXXXXXXHaving a ratio over 1.0, it shows that both companies are able to cover their short-term debts with their current assets. Although both companies are able to cover their current debt, investors should look into what type of assets they have and determine how quickly those could be liquidated. The increase in EA’s current ratio and quick ratio can be due to their increase in current assets. In the same year, it shows that Activision’s ratios have both decreased. Both of these changes show changes in both companies’ ability to liquidate their assets. From the increase, EA’s ability to liquidate their current assets is improving and Activision’s is diminishing.
Creditorsneed to really look into a company’s ability to pay their short-term debt, as well as the liquidity of their short-term assets because this is a big factor in showing them if the company is able to make the payments to the creditors on time. Looking at the current ratio, quick ratio, and cash ratio, creditors will have a good idea of the liquidity of the company’s assets. Being able to pay back their creditors, by showing that their current assets can cover their current liabilities is a good sign for creditors to see. Out of these ratios, the cash ratio does not take inventory into consideration. However, EA did not report inventory for these years. The cash ratio also does not incorporate accounts receivable even though it is classified as a current asset. Having a ratio over 1.0 will show creditors the company can cover either liabilities, which both companies show. Both companies show that their cash ratio has increased from 2016 to 2017, putting them both in a good position to pay back their short-term debt and also shows their current assets can cover their current liabilities, which shows they can be liquidated if needed.
An auditor’s report is formatted according to generally accepted auditing standards (GAAS). A company will have auditors come in once the financial statements are finalized. This information is important for all shareholders in order to hold their management accountable for their performance throughout the time documented in these financial statements. An audit will give stakeholders insight as to the fairness and truth of these reports and will let all shareholders and any stakeholders know if they have been prepared in accordance with the GAAP.
Usually, a company’s audit is conducted, by an external party, after their financial statements are complete in order to review their findings to check for any errors or identify any questionable practices within the company and also to make sure everything is in accordance with GAAP. Having to be accountable for what is reported on these financial statements makes it important for management to implement ethical practices within the company. Having the financial statements audited ensures that the management’s decisions will be reviewed periodically and holds them accountable for the reporting and methods used. Not only do auditors review their financial statements, auditors also review the internal controls in place. By reviewing the internal controls along with the financial statements, auditors ensure that the company has essentially audited themselves. Auditors look at these controls to test the effectiveness of the controls the company has in place to prevent or detect any misconduct or discrepancies first hand. Depending on how strong the auditors perceive the company’s internal controls to be, they can also choose to report upon these and express their opinion if any procedures should be changed or not.
According to the AICPA, the auditor’s report consists of an introductory paragraph which identifies the financial statements audited. The introductory paragraph starts with a title, then a statement “that the financial statements identified in the report were audited,” followed by a statement stating that the “financial statements are the responsibility of the Company’s management and that the auditor’s responsibility is to express an opinion on the financial statements based on his or her audit” (AICPA, n.d.). Next, a scope paragraph which describes the nature of the audit. The report then needs to state that the audit was conducted according to the GAAS and also state that those standards require that the “auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.” This paragraph will explain that the audit is examining, on a test basis, “evidence supporting the amounts and disclosures in the financial statements,” that it includes the assessment of the accounting principles used and “significant estimates made by management” and also that the audit evaluates the “overall financial statement presentation.” Lastly, a paragraph expressing the auditor’s opinion. The opinion expresses whether or not the auditors believe the “financial statements present fairly the financial position of the Company as of the balance sheet date and the results of its operations and its cash flows for the period then ended in conformity with GAAP.”
As important as the financial reports are, the footnotes are just as important to have and are just as important for the auditors to review. The footnotes to the financial reports are issued separately from the financials, and are often considerably long, constantly being updated, and difficult to finish in a timely manner considering the financials are being changed up until the point they are finalized, meaning all changes would still have to be documented in the footnotes before they are issued. The footnotes provide additional information from the company to explain any irregularities or perceived inconsistencies to explain how they arrived at their figures. The notes explain more in-depth how the numbers were derived in order to provide more clarity about them for the financial statements. The footnotes include accounting methodologies that are used, details about pension plans, information about compensation for stock options, nonmonetary transactions, and any accounting changes in the principles used and what type of effect that change will have. These changes can sometimes impact the company’s future profitability and an explanation of this would also be included in the footnotes. Whether the impact is negative or positive, information having to do with any future activities that will have a significant impact on the business will most likely be noted in the footnotes. The reader would have access to this information just in case they feel it is necessary to look into. The reader could look into the footnotes for any definitions or calculations they need in order to interpret data within the financial statements. Calculations such as how the company calculated its earnings per share would be included in their footnotes. While companies should internally audit themselves to ensure the effectiveness of the controls they have in place and also to ensure the credibility of their financial statements, audits provide an objective examination of this as well and because the audit is conducted by an external party, it increases the value and credibility of these statements, increasing the confidence in them and also reducing risks for all stakeholders involved.
AICPA. (n.d.).Reports on audited financial statements.Retrieved fromhttps://www.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledocuments/au-00508.pdf
Bragg, Steven. (2018).Financial statement footnotes.AccountingTools. Retrieved fromhttps://www.accountingtools.com/articles/what-are-financial-statement-footnotes.html
Investopedia. (2018).Auditor’s report.Retrieved fromhttps://www.investopedia.com/terms/a/auditorsreport.asp
Investopedia. (2018).Footnotes to the financial statements.Retrieved fromhttps://www.investopedia.com/terms/f/footnote.asp
PART 6 – Conclusion for EA and Activision Analysis
Looking into the gaming industry and comparing these companies as a manager, creditor, and investor has been a good way to understand the financial health of these companies. These two companies are have grown by almost a combined $80 billion from offering games as a service and microtransactions. Games as a service “represent a revenue model in which video games can be monetized after they are released” (Arrambide, XXXXXXXXXXThis is where microtransactions are introduced to consumers. Microtransactions are “in-game purchases that unlock specific features of gives the user special abilities, characters or content (Agarwal, XXXXXXXXXXSince these gaming companies are the ones known for their huge increase in sales due to these features, they were the two to be analyzed. Through the analysis each company was looked as from the standpoint of a manager, creditor, and investor. Looking at the current stock prices, which Nasdaq reports at $51.6 for Activision and $85.76 for Electronic Arts (EA), we would want to see why both stocks have been dropping. Looking into the future of the companies, the products and services they offer, and how their products and services compare within their industry, managers, investors, and creditors will be able to decide which company would be more appealing.
Through each lense, you would need to look into the type of risk the company will pose to them. Investors are looking to make money, so one of their main focuses should be the cash flow and cash of the company. Whether it is their sales, cash flow, or how they generate their revenue, investors should pay close attention to this aspect of the company’s financials. Looking at a company’s profitability, managers, investors and creditors will be able to see how efficient the company is in covering their costs. The gross margin can show management how much they can mark up their prices over cost of goods sold, shows if the company can cover operating costs, dividends, which investors are looking to receive, and depreciation. Going through the analysis of profitability, EA has a very strong position compared to Activision.
Just as important to managers, investors, and creditors as profit, is the company’s debt. Looking at a company’s debt ratio you can measure “the extent of a company’s leverage” (Investopedia, XXXXXXXXXXComparing EA’s 2016 and 2017 debt ratio to Activision’s of the same year, we saw that EA’s debt ratio is decreasing and Activision’s is increasing. Keeping a low debt ratio shows that the company is not over using their leverage to fund projects. By also looking at the debt-to-equity ratio, investors will be able to see how much of a risk they are taking my investing in the company. The debt-to-equity ratio “measures a company’s debt relative to the value of its net assets, it is most often used to gauge the extent to which a company is taking on debt as a means of leveraging its assets” (Investopedia, XXXXXXXXXXWhile there is only a 0.10 difference in the companies’ debt-to-equity ratios, the does show investors that Activision would be a riskier choice, again, putting EA in the better financial position.
Going through an analysis of EA and Activision’s financial statements, managers, investors and creditors have a lot to consider. Based on an analysis by MarketWatch, it shows that EA is rated higher than Activision as a stock that may rise. This analysis puts EA at an 80% rating to buy, while Activision was given a 69% rating to buy. This is in agreement with the decision I would make as a manager, investor and creditor. Through the analysis of numerous ratios, showing profitability, debt, cash flow, and liquidity, EA has a stronger financial position, more lucrative future projections, and a better value to invest in.
Agarwal, P. (2017).Economics of microtransactions in video games.Retrieved fromhttps://www.intelligenteconomist.com/economics-of-microtransactions/
Arrambide, K. (2018).Games as a service – the model of microtransactions.Retrieved fromhttps://medium.com/@hcigamesgroup/games-as-a-service-the-model-of-microtransactions-1a0e1e847119
Investopedia. (2018).Debt ratio.Retrieved fromhttps://www.investopedia.com/terms/d/debtratio.asp
Investopedia. (2018).Debt/equity ratio.Retrieved fromhttps://www.investopedia.com/terms/d/debtequityratio.asp
MarketWatch. (2018).These big tech stocks may rise at least 30%, analysts predict.Retrieved fromhttps://www.marketwatch.com/story/these-big-tech-stocks-may-rise-at-least-30-analysts-predict XXXXXXXXXX
Nasdaq. (2018).ATVI company financials.Retrieved fromhttps://www.nasdaq.com/symbol/atvi/financials?query=balance-sheet
Nasdaq. (2018).EA company financials.Retrieved fromhttps://www.nasdaq.com/symbol/ea/financials?query=balance-sheet