The aim of this financial and analysis report is to evaluate the performance of Ford Motors as one of the companies enlisted in Fortunes 500.
Accounting for assets
The Ford’s net property is valued at a cost, less the accumulated impairments and depreciation. The company capitalizes new assets when the management expects to utilize such an asset for more than 12 months. The company also expenses the repair and maintenance costs as they occur. The cost of depreciation is calculated by the use of the straight-line approach over the approximated useful asset life. The straight-line method is advantageous since the value of depreciation cost of the future asset is already known when the asset is acquired. The company’s asset life varies from 3 to 36 years, with the estimated service lives of machinery and equipment being 14.5 years; land improvements, 30 years; software, 3 years; and buildings, 36 years. Furthermore, tooling is generally subjected to amortization over the expected product program life through a straight-line approach (Annual Report 2014).
The Ford’s debt is comprised of long-term and short-term unsecured and secured debt securities and borrowings from banks and other lending institutions. Furthermore, debt issuances are either done by the company, underwriters, or securities dealers and these issuances are held by retail and institutional investors. It is also significant to note that Ford Credit sponsors the programs for securitization in an effort to provide asset-backed financing (short term and long term) vial institutional investors in the international capital markets, and the United States in particular. The debt liability is recorded on the company’s balance sheet at an adjusted par value for premium or unamortized discount and other adjustments pertinent to fair value hedges in respect to Ford’s policy. Over the life of a debt, the costs, premiums, and discounts are amortized and recorded at the interest expense in the comprehensive income statement (Annual Report 2014).
Ford’s equity securities are normally valued at the quoted prices and are basically exchange-traded. In addition, securities for which the official last traded pricing on the ongoing exchange are categorized as Level 1 based on fair value. When the last trade prices are unavailable, the company’s equity securities are often valued at the last bid quoted prices and are, thus, categorized as Level 2 (Annual Report 2014).
Company’s inventory valuation method
All the inventories of Ford Motors are stated at a lower market cost. About 28 % (in 2014) and 20 % (in 2013) of Ford’s inventories in the United States were determined using LIFO (Last in, First out) inventory valuation approach. However, the cost of the rest of the inventories was valuated using FIFO (First in, First out) approach as a costing method. It is significant to note that inventory’s purchase price is important in evaluating the effect of FIFO and LIFO on the general purpose financial reports. During the times of cost increase, LIFO method will lead to increased cost of goods sold, but result in lower inventory values at the end of the period (Reeve, Duchac & Warren, 2012). During the times of cost decrease, LIFO method will lead to reduced cost of goods sold, but result in high inventory values at the period end. The following table shows the valuation of Ford’s inventory using both FIFO and LIFO:
Approach to internal control and compliance with Sarbanes-Oxley
Ford’s internal control over financial reporting can be regarded as a process that is aimed at providing a reasonable guarantee concerning the reliability and preparation of general purpose financial reports (financial reports for external uses) based on generally accepted accounting principles (GAAP). A company’s internal control includes the policies and procedures that ensure reasonable maintenance of records in an accurate and fair manner by reflecting dispositions and transactions of the assets; that the transactions are recorded based on GAAP; and that there is justifiable assurance concerning the protection of assets against unauthorized use, acquisition, and disposal. Due to the interest limitations, the prevailing internal control may not be in a position to detect or prevent misstatements in financial statements. The inherent limitations include, but not limited to, human error possibility, fraud, and internal control override or circumvention. An effective internal control system protects a company’s assets and ensures accuracy in financial reporting of financial position and income. Ford Company has struggled to implement the internal controls provided by Sarbanes-Oxley Act due to the high cost involved. Nonetheless, the company has complied with the Sarbanes-Oxley Act (Annual Report 2014).
Horizontal and vertical financial statement analyses
Horizontal analysis is also known as trend or time-series analysis of items of financial statements by determining the percentage change between two financial years with the previous year used as a basis for computation (Needles, Powers & Crosson, 2011). Income statement and statement of financial position uses the same principle of horizontal analysis. In the horizontal analysis, positive percentage change implies an increase and negative percentage change represents a decrease.
Interpretation and deductions
The company’s revenue decreased in 2014 as indicated by the negative percentage change, largely due to 11 % decrease of F-Series cars. The cost of revenue reduces in 2014 due to the increasing prices of raw materials. The cost of revenue reduced in 2014 when there was slight decline. Due to the trend of sales revenues and cost of sales, gross profit decreased in 2014. Also, Net profit decreased in 2014. The overall implication is that there was a decrease in the company’s performance.
Current assets and non-current assets depict a positive percentage change since 2013 to 2014. This implies that Ford has been increasing its investment in assets. However, current and noncurrent liabilities have also been increasing, affecting the company’s liquidity and solvency level.
It is computed by taking revenue as a base through which all other components are expressed in percentage form (Needles, Powers & Crosson, 2011). The vertical analysis of Ford’s income statement is as follows.
The percentage component of cost of revenue is also known as mark-up ratio. Mark-up ratio is used to evaluate the percentage marginal cost of revenue incurred in selling vehicles. The marginal cost of making revenues increased in 2014 to 87.60% and this has an effect on the profitability of the company. The component percentage of gross profit is also known as gross margin, which evaluates the marginal profit of selling vehicles. The gross margin is only 12 %. Operating income margin reduced from 3.70% to 2.6% in 2014. In addition, the net profit margin reduced from 4.87% to 2.21% in 2014. These results indicate that the profitability level of Ford Motors slightly decreased in 2014.
The vertical analysis (common-size) of balance sheet is computed by taking total assets as a base from which all other items are expressed in the percentage form (Needles, Powers & Crosson, 2011). Ford’s vertical analysis of the balance sheet is as follows:
Ford’s current assets are about 75% of the total assets and this implies that the company is investing more in short-term investments than in long-term basis. Since Ford is an automobile company that require intensive capital, its non-current liabilities are more than short-term liabilities. The percentage of total liabilities to total assets is the debt ratio. Debt ratio evaluates the stability of a company by assessing the amount of debt used to acquire assets. It is noted that total assets are funded by debt financing up to 87.5%. The percentage of shareholders’ equity to total assets is known as the equity multiplier (11.90% -2014 and 13.06 %). The outcome of this analysis indicates that the capital structure of Ford Motors is highly leveraged.
The following are financial ratios for Ford in 2014 and 2013
Return on equity: This is a profit ratio that determines the amount of net profit generated by shareholders’ funds. In 2014, Ford’s return on equity reduced from 27.12% to 12.85% - implying a decrease in profitability level.
Debt ratio: it is the ratio of total debt to total assets. It evaluates the extent to which debt financing has been used in the acquisition of a company’s assets. The higher the debt ratio is, the higher the risk of debt burden and credit default. Ford’s debt ratio increased in 2014 and so is the debt burden.
Inventory turnover: Evaluates the efficiency or speed with which the company’s management is able to convert inventory into cost of revenue or sales revenue. The higher the inventory turnover is, the higher the inventory management efficiency. Ford’s inventory turnover slightly reduces in 2014 and so is its efficiency.
Equity multiplier: Evaluates the extent to which equity has been used in the acquisition of a company’s assets. The higher the equity multiplier is, the lower the credit risk. Ford’s equity multiplier slightly decreases in 2014.
Current ratio: Evaluates the liquidity level of a company by comparing current assets with current liabilities. A current ratio of 2.00 and above is recommendable. Ford’s current ratio is 2.00 and this indicates that the company has a stable liquidity level.
Overall financial performance
It can be concluded that overall financial performance was lower in 2014 in comparison to 2013. The decreased performance is contributed by reduced profitability level, liquidity, efficiency, and financial stability. Although Ford’s financial performance was lower, it cannot cause major panic since the decline was trivial and can be easily recovered in the next financial year.
Users of financial statements
Users of financial statements are both external and internal. Internal users such as management and employees use special purpose financial reports to plan time and resources in the organization. Nevertheless, external users such investors, government, creditors, investment analysts, and trade unions use general purpose financial reports based on their interest as far as the company is concerned. Investors would like to know whether the company is worth investing; government would like to account for tax obligation; creditors are interested in liquidity; investment analysts would like to give financial advice to potential investors; and trade unions would like to evaluate the company’s profitability to advocate for employees’ welfare.
Ford Motor Company Annual Report 2014.. Available at http://corporate.ford.com/annual-reports/annual-report-2014/files/201_Ford_Annual_Report_sm.pdf
Needles, B. E., Powers, M., & Crosson, S. V. (2011). Principles of accounting. Mason, Ohio: Cengage Learning.
Reeve, J. M., Duchac, J. E., & Warren, C. S. (2012). Financial and managerial accounting. Mason, Ohio: South-Western Cengage Learning.