Evaluation of Accounting Questions … Term Paper
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Resource Structure Analysis
The statistics indicate that in the five-year period Kimberly-Clark has had a greater workforce than those employed by SCA. However, one of the key point to note are, in the past year, SCA had a considerable increase in its workforce with an increase of 10,243 employees over last year. This is in contrast to Kimberly-Clark as in the past year it had a considerable decline in its workforce with a decline in about 14,000 employees. However, the sales amount is the reverse. Kimberly-Clark has constantly had a lower number of sales compared to SCA. More so, the sales of the latter has constantly increased in the past four years from 81,337 in 2011 to 85,408 in 2012 to 89,019 in 2013 and further up to 104,054 in 2014. This implies that SCA is better at utilizing its resources. However, one important aspect to take into consideration is that the capital employed by SCA is substantially greater to that employed by Kimberly-Clark.
Centered on the performances of the three financial metrics, a company performance is measured on its capability to increase its return on assets (ROE) by sustaining a high profit margin -- that is, increasing its asset turnover and also leveraging its assets in a more efficacious manner. The ROE of Kimberly-Clark in the past five years has been considerably greater compared to that of SCA. This indicates that Kimberly-Clark has been more profitable compared to SCA.
In the past four years, the return on capital employed (ROCE) of SCA has constantly increased from 3.5 in 2011 to 6.5 in 2012 to 8.5 in 2013 and further to 9.4 in 2014. On the other hand, the ROCE of Kimberly-Clark has been inconsistent as it increased from 18.7 in 2011 to 20.9 in 2012 and further to 26.2 in 2013. However, the ratio declined to 25.0 in 2014. However, it is imperative to point out that in the five-year period between 2010 and 2014 the ROCE of Kimberly-Clark has been considerably greater than that of SCA as illustrated in the graph below. This implies that Kimberly-Clark's assets have been performing more effectively while taking into account long-term financing. ROCE informs investors the profit generated by a company for every dollar it puts to use. For instance, in 2014, for every dollar invested by the investors of Kimberly-Clark, the profit generated was 25 cents while that for SCA was only 9.4 cents. The implication of this in the future is that that Kimberly-Clark has greater longevity compared to SCA.
Therefore, in general, the financial ratios indicate that Kimberly-Clark is a more profitable and sustainable business entity compared to SCA. Therefore, on this count, this will be more appealing for investors and creditors and they will be more willing to invest and lend to the company compared to SCA.
The financial structure of the two companies is different as portrayed by the debt to equity ratio and equity to assets ratio. In the past five years, the debt to equity ratio of SCA has been lower in comparison to that of Kimberly-Clark. Having a significantly lower ratio implies that SCA is a more financially stable corporation. On the other hand, Kimberly-Clark having a higher debt to equity ratio making it be riskier, particularly for investors and creditors. This is for the reason that, different from having a financial structure that is capitalized from equity, the debt has to be recompensed to the lenders. The implication of this in the future is that Kimberly-Clark might find debt financing to be a significantly costly form of financing compared to equity financing. For instance, in the last year 2014, the debt to equity ratio of SCA is 0.62 while that for Kimberly-Clark is 1.38. This implies that with regard to SCA, for every dollar of the company's assets that investors own, the creditors only own 62 cents. On the other hand, with regard to Kimberly-Clark, for every dollar of the company's assets that investors own, the investors own 138 cents.
The equity ratio points toward two significant financial aspects of a business that is not only solvent but also sustainable. It is indicative of how much of the company's assets were financed by investors. In the five-year period, SCA has had a significant equity ratio compared to Kimberly-Clark. Having a higher equity ratio is favorable for SCA, not only in the present but also in the future. This is for the reason that the high levels of investment by the shareholders is indicative to prospective shareholders that SCA is a company that is worth investing in, considering the fact that several investors are eager to finance the corporation. In addition, the significantly higher equity ratio is indicative to prospective creditors that SCA is a more sustainable business entity compared to Kimberly-Clark and more so less risky to lend loans in the future periods.
Assignment 2: Consolidated Accounts
a) Consolidated financial statements point to an amalgamation of a financial relationship between a parent company and a subsidiary. Therefore, when a parent company makes an acquisition, it is imperative to make adjustments to its financial statements in order to reflect the inclusion of the assets and liabilities that have been acquired at their fair values. The carrying cost reflects the original carrying amount of the acquisition in the books of the parent company. It is necessitated that the parent company make a record of the fair value of all the subsidiary's identifiable intangible assets. It is imperative to note that this record is undertaken regardless of whether or not any amount was incurred to acquire these financial statement items in the acquisition. Considering this, if the fair value of the subsidiary, that is the acquisition plus non-controlling interest, is greater than the fair value of the net assets of the subsidiary, then this loss is added. An example of this is the negative value of the other liabilities in the consolidated statement. On the other hand, if the aforementioned amount is a deficiency, then this negative or shortage amount is recorded and considered as a gain. A good example of this is the intangible assets, current assets and deferred tax in the consolidated statement.
b) You often hear that acquisitions should increase the value of the firm. However, explain the effects on return on capital employed from an acquisition
One of the effects of an acquisition on the return on capital is that it lowers the financial ratio. This is owing to the fact that; the company uses capital to fund the purchase. The acquisition implies the issuance of additional shares. This increase in the number of shares has the effect of decreasing not only the return on capital, but also the return on equity. However, it is imperative to note that this takes place in the short-term period as the benefits of the acquisitions are yet to flow into the earnings and capital of the firm or company.
c) Goodwill is not amortized anymore according to the international accounting standards. Discuss the consequences on this with respect to income measurement and the effect on the measurement of acquisition outcome
In accordance to International Financial Reporting Standard 3 (IFRS3), the amortization of goodwill is not permitted. Rather, goodwill ought to be tested for impairment frequently. This has come to be the sole approach for the subsequent accounting treatment of goodwill. The impact of this is that, in the case of the absence of an impairment loss, the earnings before interest and tax (EBIT) as well as the earnings would increase. The implication is that the valuation metrics, for the two measures, which are price to earnings and enterprise value to earnings before interest and tax, have to be revised downwards in order to make adjustments for the IFRS-prompted rise in EBIT and E.
d) With the implementation of IFRS 3 we suddenly have many more intangible assets on the consolidated balance sheets, such as customer relationships. Make an argument for whether you like this development or not and provide arguments supporting your standpoint
The IFRS 3 has instigated the mandatory application of the purchase method, which necessitates the entity making acquisitions to account for all of its acquired assets and assumed liabilities as well as contingent liabilities on a fair value basis. The implication is that through the purchase method, the intangible assets such as customer relationship have to be measured at their fair value. Such an allocation is open to debate; the main contention would be against the increase in intangible assets on the consolidated balance sheets. More and more companies will make recognition of high values of intangible assets, for instance goodwill, customer relationships, brands and technology on the consolidated balance sheets, many of which cannot be measured by any of the available means. Effectually, in some instances, these values might surpass the amount of equity. As a result, there will be a considerable adverse impact on earnings in the future financial periods owing to the planned amortization of… [END OF PREVIEW]
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