Financial Analysis Project Place your responses below each question in this document. For any question requiring computations, please show your work. When completed, upload this document using the...

2
Financial Analysis Project
Place your responses below each question in this document.
For any question requiring computations, please show your work.
When completed, upload this document using the appropriate link in BlackBoard.
Following the instructions in the textbook on pp. 1-26 through 1-28, download:
a. Amazon’s Form 10-K from the EDGAR website
i. HTML and XLSX versions
b. Alphabet’s Form 10-K from the EDGAR website
i. HTML and XLSX versions
AMAZON COM INC
For each company, do the following:
1. Ans: Refer Ans 1 of Alphabet Inc
a. Note dates and time periods covered
Ans: Amazon 10K date: February 3, 2021
- Consolidated Balance Sheets - Year 31st December 2020 and 31st December 2019
- Consolidated Statements of Operations – for each of the three years in the period ended December 31, 2020
- Consolidated Statements of Comprehensive Income – for 3 years ending 31st Dec 2018, 31st Dec 2019 and 31st Dec 2020.
- Consolidated Statements of Stockholder’s Equity – movement from 1st January 2018 to 31st December 2020
- Consolidated Statements of Cash Flows - for each of the three fiscal years ended December 31, 2018, December 31, 2019 and December 2020.
2. Identify the name of the audit firm
It is Ernst & Young LLP

a. Note the type of Audit Opinion
Ans: Ernst & Young LLP has given an unqualified opinion. They have given a critical audit matter relating to Uncertain Tax Positions for which the ultimate tax determination is uncertain. As a result, significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes.
3. Prepare a DuPont analysis with Leverage
a. Comment on their strategy

Fiscal 2020 (Amounts in $ mn)
Net profit margin = Net Income/Revenue = 21,331 / 386,064 *100 = 5.52%
Asset Turnover = Sales/ Average Total Assets = 386,064/ 321,195 = 1.2
Equity Multiplier = Avg total assets/ Total Shareholder equity = 321,195 / 93,404 = 3.44
Dupont analysis = 5.52 * 1.2 * 3.44 = 22.83. They have debt of $ 2,27,791mn and equity of $ 93,404mn so financial leverage is high and assets are generating slightly more than equal turnover.
4. Compare the A/R TO and A/P TO
Accounts Receivable
Fiscal year 2020: $ 24,542 mn; Fiscal year 2019: $ 20,816. Increase of 18% YoY.
Accounts Payable
Fiscal year 2020: $ 72,539 mn; Fiscal year 2019: $ 47,183. Increase of 54% YoY.
a. What implications for cash flows do you observe?
Increase in Accounts receivable is being deducted from cash flows in 2018, 2019 and 2020 for arriving at cash from operations. Increase in accounts payable is being deducted from cash flows.
5. The major sources of cash are:
a. Inflows:
In the fiscal 2020,
i. sale and maturities of marketable securities of $ 50,237 mn (Investing activity),
ii. Proceeds from property and equipment sales and incentives $ 5,096 mn (Investing activity)
iii. Proceeds from long term debt $ 10,525 mn (Financing Activity)
iv. Short term debt and others $ 6,796 mn (Financing Activity)
Outflows:
i. Purchase of marketable securities of $72,479 mn
ii. Principal repayment of Finance Leases of $ 10,642 mn
iii. Repayment of short-term debt $ 6,177 mn
6.
Ans: 2020 (Amount in $ Mn)
Total Debt/ Total Asset = Long term debt/ Total assets
$ 101,406 / $ 321,195 (Total debt: 52573 + 31816 + 17017) = 0.3157: 1
Total assets are financed 31% through debt.
7. Ans:
2020
ROE = Net profit / Equity *100,
$ 21,331mn/ 93,404 mn*100 = 22.84%
a. Compare to ROA
Ans: ROA = Net Profit/ Total Assets *100,
21,331/ 321,195 * 100 = 6.64 %
The ROA is lesser than ROE basically due to exclusion of current and long-term liabilities in calculation of ROA.
i. Does the organization have positive or negative leverage?
Long term debt = $101,406 mn
Equity = $ 93,404 mn
Since debt is greater than equity, Company has a negative leverage.
8. Ans.
Net Book Value: Fiscal 2020: 93,404 mn (total shareholder equity)
a. Market Price per share as on 26 Jun 2021: $ 3,401.46 Market capitalization= 503 mn * 3,401.46 = $ 1,710,934 mn
b. Market to Book Ratio = Market capitalization / Total Shareholder equity
i.e. 1,710,934 / 93, 404 = 18.318 times
c. It is not equal to 1 since market capitalization is greater than book value of equity. Market price is on a higher side than book value per share.
9. Ans.
a. Preferred stock: authorized = 500, issued and outstanding = None
b. Common Stock Par value is $0.01 per share. The additional capital is $42,865 mn and outstanding shares are 503 mn so the additional price over and above par value of $ 0.01 is 42,865 / 503 i.e $ 85.22 (Fiscal 2020)
c. Companies issue shares at low par value to avoid any liability to stockholders should the price of stock decline drastically.
10.
Ans: A treasury stock is a stock which is bought back by the issuing company from the open market. It is negative since it reduces the paid-up capital.
11. Should the company ever pay out dividends? Why, or why not?
a. How much profit has the company retained in the business, after paying out all dividends?
Ans: The Company should pay dividends if the Company has sufficient profit during current year or carrying forward from previous period. Also, one needs to check that there is sufficient cash available in the business to meet all obligations, expenses before payment of dividends. The amount of reserves/ accruals for future needs is also a determinant in deciding dividend payouts in the current year. It should be such amount which maximizes market capitalization. No information about dividend is given in the financial statements. The retained earnings are $ 93,404 mn.
12. From the Balance Sheet, identify any items classified as “Unearned Revenue”
a. What might they represent?
Ans: In the case of Amazon, unearned revenue primarily consists of prepayments of AWS services and Amazon Prime memberships. They represent payments received or due in advance of performing our service obligations and is recognized over the service period.
13. From the Balance Sheet, identify the amount of Accounts Receivable
a. Identify the amount of the allowance for uncollectible accounts.
Ans: The accounts receivable balance as on 31st Dec 2020 is $ 24.542 bn. The allowance for doubtful accounts was $ 495 mn, $718 mn and $ 1.1 bn as of 31st Dec 2018,2019 and 2020. Additions to the allowance were $ 878 mn, $ 1.0 bn and $ 1.4 bn and deductions to the allowance were $731 mn, $793 mn, $ 1.0 bn in 2018, 2019 and 2020.
b. What percentage of Accounts Receivable do they expect to collect? Is that good or bad?
The accounts receivable balance as on 31st Dec 2020 is $ 24.542 bn and allowance for doubtful debt is $ 1.1 bn as on that date. This means that the percentage of allowance is 4.48%. The allowance for doubtful debt is not too high but it can be lowered by following effective credit policies with customer, monitoring of debtors and imposition of interest on delayed payments.

14. Ans:
In the case of Amazon, unearned revenue mainly consists of prepayments of AWS services and Amazon Prime memberships. Generally deferred revenue is recognized as earned revenue on the income statement as the good or service is delivered to the customer.
15. Ans:
a. Yes, they have intangibles assets of $ 4,981 mn as on 31st Dec 2020(net acquired intangibles). They are basically acquired non-tangible assets having no physical presence and are divided into four categories namely contract based, marketing related, customer related and technology and content- based.
b. All of these have a finite life between one and twenty five years. Intangibles that are acquired in business combination that are in process and used in research and development are considered indefinite lived until completion of research and development efforts.

16.
Ans: Working capital equals Current Assets less Current liabilities
For Fiscal 2020 Working capital = $ 132, 733 - $ 126,385 = $ 6,384 mn
Current Ratio = Current Assets/ Current liabilities = 132,733 / 126,385 = 1.05: 1
The current ratio is 1.05 which means current assets are almost equal to current liabilities.
17. Using Excel, perform a Vertical (common size) Analysis on the Income Statement, and Balance Sheet.
a. Describe any notable proportions identified and indicate why they caught your attention
Ans:
    Income Statement (Verical Analysis)
    
    
    ($ million)
    
    Particulars
    2019
    %
    2020
    %
    Net product sales
     1,60,408
     57.18
     2,15,915
     55.93
    Net product sales
     1,20,114
     42.82
     1,70,149
     44.07
    Total Net sales (A)
     2,80,522
     100.00
     3,86,064
     100.00
     
     
     
     
     
    Operating expenses
     
     
     
     
    Total operating expenses (B)
     2,65,981
     94.82
     3,63,165
     94.07
     
     
     
     
     
    Operating Income (A-B=C)
     14,541
     5.18
     22,899
     5.93
     
     
     
     
     
    Interest income
    832
     0.30
    555
     0.14
    Interest expense
     -1,600
     -0.57
     -1,647
     -0.43
    Other expense (income), net
     203
     0.07
     2,371
     0.61
    Total Non-operating income (D)
     -565
     -0.20
     1,279
     0.33
     
     
     
     
     
    Income before taxes (C-D= E)
     13,976
     4.98
     24,178
     6.26
    Provision for income tax (F)
    -2374
     -0.85
    -2863
     -0.74
    Equity method (G)
    -14
     -0.00
    16
     0.00
     
     
     
     
     
    Net income (E+G-F)
     11,588
     4.13
     21,331
     5.53
    
    
    
    
    
The net income margin has increased from 4.13 % to 5.5% from fiscal 2019 to 2020. This is primarily due to increase in net sales. Also, one thing to note is that Other income has increased in fiscal 2020 (0.61% of revenue) and interest expense has also declined to 0.43 % of revenue in current fiscal.
    Balance Sheet
    
    
    
    $ million
    Particulars
    2019
    %
    2020
    %
    Assets
     
     
     
     
    Cash
     36,092.00
     16.02
     42,122.00
     18.70
    Marketable securities
     18,929.00
     8.40
     42,274.00
     18.77
    Inventories
     20,497.00
     9.10
     23,795.00
     10.56
    Acocunts receivable
     20,816.00
     9.24
     24,542.00
     10.90
    Total Current Assets
     96,334.00
     42.77
     1,32,733.00
     58.93
    Property Plant and Equipment
     72,705.00
     32.28
     1,13,114.00
     50.22
    Operating leases
     25,141.00
     11.16
     37,553.00
     16.67
    Goodwill
     14,754.00
     6.55
     15,017.00
     6.67
    Other Assets
     ...