Peyton Enterprises Financial Reporting Analysis Rashid Ali Shah 25-Apr-17
Submitted to: Mr sajjad Ahmed Section:
MBA case study(a)
Overview of case
Peyton case discussed regarding the accounting policies, which used in company. The Company using aggressive method to show more profit in income statement. The case focuses on three basic accounting topics-LIFO inventory reserves, the allowance for doubtful accounts, and depreciation policies and assumptions-that span the range o f earnings management considerations. The Peyton management wants to change accounting policies and want use to conservatism policy which shows higher expense a nd less income in income statement. Develop an understanding of different possible concessions, management want to launch IPO to show stronger position of company to attract more investors towards peyton enterprises. Company overview
Peyton specialty to design manufacture equipment and component product used in chemical industries. It has been operating since 1947, has had a strong reputation as a reliable and affordable product filtration supplier throughout the United States. New CEO of Peyton is McNeilly, who was just employed six months ago and came with an impressive record of executive leadership and financial planning was Berry. Berry was very aggressive with policies in light of the company's recent negative performance. It showed that any incitement to revenue from the crazy accounting decision under her watch "simply would not happen" The competitor of peyton enterprise is (general electric, and Pall Corporation) and smaller companies. Different chemical companies used as sole supplier of P eyton enterprises and some companies made contract of 10 years with Peyton enterprises. NEW CEO McNilly
McNilly was hired to help turn the company back to growing profitability her compensation consisted with salary plus promise of cash bonus based upon Peyton ROA, earning growth and successful IPO. IPO would raise capital to fuel the expected future growth in life science sector and would facilitate the implementation of share bas ed compensation scheme for senior management and lower level of employee. She proposed three strategies given below 1, the last year allowance for doubtful account for 2013 dropped 2.5% McNilly wanted to see 4.5 % in 2014 about current affairs of financial statement. Increase in next year increase from 2.5 to 4.5 of allowance doubtful accounts. She is risk averse to manage bad debts as account receivable increase. 2, McNilly viewed don’t slow down inventory because a slowdown in purchase created inventory supply risk. 3, McNally flatly proposed to reduce average useful life from five to seven year or switching from straight line method to DDM. She wants to recover cost in shorter period to manage risk.
Issues in case
1. 2. 3. 4. 5.
Sales growth slowed. Difficulties in controlling costs. Reduction in demand for goods due to reduced use of coal. IPO Was delayed due to the less market shareholder Inventory slow down
April, 2015 Berry asked Stan Emmott, company controller of the company's accounting policies Emmott receivable, inventory, and fixed assets, the company was aware of account’s have to look at what went. Emmott then to take care of solving the above problems and Barry McNeilly accounting methods and assumptions a company is currently following. He decided to change some of their accounting methods. The company management doesn’t maintain its inventory and accounts receivables. The recovery management of company is not good because there was problem of allowance for doubtful accounts and recovery of accounts receivable. ANS
Income Statement of Peyton enterprise 2014
2013
2012
Sales
2462171
3040570
2677547
COGS
1779209
2134007
1887692
GP
682962
906563
789855
SG&A Operating Income Net Fiancing cost other Expanes
506563
579292
521699
176399
327271
268156
1417
1570
532
3431
3578
3793
EBIT
171551
322123
263831
Taxes
60043
112743
92341
111508
209380
171490
NI
Ratios analysis 2013
2014
Sales %
14%
-19%
COGS%
70%
72%
GP%
30%
28%
S&GA%
64%
74%
OI%
36%
26%
TAXES NI PER Sales
35%
35%
7%
5%
The sale of company decrease in 2014 by 19% .its shows company is not performing well because business of companies pull down . It’s horrible moment for company to grow. Cost of goods sold also increase even sale is decreasing. Gross profit also decreases in 2014 as compare to 2013. Net profit goes down in 2014. Even company wants to launch new share in market to attract investor. How investor attract when profit not high as previous years.
Balance sheet Analysis 2014
2013
Cash
73164
78442
A/R
329880
302043
Inventories
281417
218506
52819
41155
TCA
737280
640146
PPE
268630
254103
91267
84840
106849
106849
1204026
1085938
A/P other Current
136575
125890
45426
46130
TCL
182001
172020
pension
10919
19750
other LD
26272
24133
TL Share Holder eq
219192
215903
CS
163893
163893
RE
824362
712854
-3421
-4569
984834
872178
1204026
1088081
Others
Intangible Good Wil TA Libilites
AOC TSE Total
Ratios
2014
2013
CR
4.050967
3.721346
Quick RA
2.504728
2.45111
NWC RA
0.461185
0.43108
RoA
9%
19%
ROE
11%
24%
EPS
0.680371
1.277541
2.044948
2.799948
7.463838
10.06668
6.322322
9.766354
Capitial Structure Debt to Equity
22%
25%
Debt to allowance
3%
4%
Liquaidity Ratios
Protifibility Analysis
Assest Turnover AR Turnover ITO
Current ratio of company increasing by 4.050967 in 2014 as compare to3.721346 2013 its show accounts receivable is stuck towards customer. Inventory is slowdown. Profitability of compan y also low due to low sale in 2014. Return on asset also decrease by 13% in 2014.
There are two accounting Practices 1. Conservative Accounting Practices:
Conservative requires a high degree of verification before making a legal claim to any profit as it requires recognition of all probable losses as they are discovered and most expenditure as they are incurred. Revenue will be deferred until it is verified as strict revenue-recognition criteria is one of the most common forms of accounti ng
conservatism. An example of accounting conservatism — overestimating an allowance for doubtful accounts — can give a more accurate picture of recoverable receivables given a specific economic outlook. When following accounting conservatism guidelines, assets and revenue are intentionally reported at figures potentially understated. Liabilities and e xpenses are overstated when using conservative accounting. Therefore, accounting conservatism will always report lower net income and lower financial future benefits. Aggressive Accounting Practices
Lengthening asset lives (will reduce depreciation charge) Using straight line depreciation (lower depreciation in earlier years) Choosing FIFO as opposed to LIFO accounting for inventory in an inflationary environment (this leads to ending inventory being higher from lower COGS, and higher operating profit) Insufficient acquisition disclosures. Capitalisation of operating costs (this can be fraudulent – Anything that doesn’t lead to future economic benefits must be expensed) Recording investment income as revenue (Think: is management masking a decline in sales?) Recording revenue prematurely (percentage of completion incorrectly used, bill and hold).
Conclusion Company should used aggressive approach to gain investor interest. Its show high income, it will boost the confidence of investor. Inversely of aggressive approach, conservatism its lower income of due to more cost, while using LIFO and double declining method and more allowance for doubtful account of receivables, it less attractive to investors due to profit . investor nature is to maximize the profits.
