DuPont: Analyzing T-Accounts and Financial Reports

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Comparison of Financial Reports of the Companies

The financial position of company A is stronger than that of company B. The total assets of Company A at the end of 2011 amounted to $1,176,027,002 while for Company A totaled $238,968. Similarly, revenue for company A was greater than that of company B. In 2011, Company A had a net income amounting to $164,668,228 while the net income of company B amounted to 53,291. On the face of it, it can be seen that the financial performance for company A is greater than that of company B. Ratio analysis may reveal contrary results. DuPont analysis will be carried out to compare the financial position of the company. The analysis focuses on the return on assets and returns on equity of a company. Return on assets shows how effectively a firm uses assets to generate sales (Siddiqui 2005; Holmes & Sugden 2008). It is a ratio of net income to total assets. Return on equity measures how effectively the management of the organization uses the shareholders’ equity to generate revenue (Vance 2003). DuPont analysis of the two companies is shown in the tables below.

Company A

	2010	2011
Return on asset	13.73%	14.00%
Return on equity	15.41%	16.03%

Company B

	2010	2011
Return on asset	19.40%	22.30%
Return on equity	57.27%	42.02%

Even though the net income reveals that the profitability of company A is greater than that of company B, the profitability ratios give a contrary result. The return on assets for company B is greater than that of company A. Return on assets for both companies increased from 2010 to 2011. Also, the return on equity for company B is greater than for company A for the two-year period. However, the return on equity for company A increased from 2010 to 2011 while that of company B declined. Based on the ratios, it is evident that company B is more efficient in using assets and equity to generate net income than company A (Collier 2009; Fraser 2009; Haber 2004). Therefore, it is more profitable.

The Table Below Shows Vertical Analysis Report for Company A

Balance Sheet

	2010	2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	34.74%	30.44%
Short-term investments	8.62%	5.17%
Accounts receivable	9.53%	9.38%
Inventories	10.04%	16.05%
Prepaid expenses and other	2.40%	2.92%
Total current assets	65.35%	63.96%
PLANT AND EQUIPMENT:
Land, buildings and improvements	12.03%	11.08%
Machinery and equipment	35.16%	35.32%
Construction-in-progress	1.33%	4.95%
	48.52%	51.35%
Less-Accumulated depreciation and	(28.06%)	(27.32%)
	20.45%	24.02%
OTHER ASSETS:
Long-term investments	12.87%	10.89%
Patents and other assets, net	1.32%	1.10%
	14.19%	12.00%
	100%	100%
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
CURRENT LIABILITIES:
Accounts payable	4.01%	5.56%
Accrued liabilities:
Salaries, wages and vacation	0.57%	0.55%
Royalties	0.49%	0.57%
Dividends declared	1.56%	1.47%
Other	0.54%	0.39%
Total current liabilities	7.18%	8.56%
DEFERRED INCOME TAXES	3.69%	4.09%
SHAREHOLDERS’ INVESTMENT:
Preferred stock, no par value, 5,000,000 shares authorized; none issued or outstanding
Common stock, par value $.06 per share; 200,000,000 shares authorized; 144,069,563 shares	0.85%	0.73%
issued and outstanding in 2011 and 142,292,127 shares issued and outstanding in 2010
Additional paid-in capital	34.69%	33.60%
Retained earnings	51.34%	51.92%
Accumulated other comprehensive income:
Unrealized gain on investments	2.16%	0.88%
Cumulative translation adjustment	0.06%	0.18%
Total shareholders’ investment	89.11%	87.34%
	100%	100%

Income Statement

	2009	2010	2011
Net sales	$ 100%	$ 100%	$ 100%
Cost of goods sold	67%	64%	65%
Gross profit	33%	36%	35%
OPERATING EXPENSES:
Engineering, research and development	9%	8%	8%
Selling, general and administrative	7%	5%	5%
Total operating expenses	15%	13%	13%
Income from operations	17%	23%	23%
OTHER INCOME (EXPENSE)
Investment income	1%	0%	0%
Impairment loss on available-for-sale securities	(0)	–	–
Other, net	(0%)	1%	1%
Total other income (expense)	0%	2%	1%
Income before provision for income taxes	18%	25%	24%
Provision for income taxes	6%	8%	8%
Net income	12%	17%	16%

The Table Below Shows Vertical Analysis Report for Company B

Balance Sheet

	2010	2011
ASSETS
Current assets
Cash and cash equivalents	8.26%	8.25%
Trade accounts receivable, net of allowance for doubtful accounts of $4,615 in 2011 and $4,708 in 2010	26.09%	26.32%
Prepaid expenses and other current assets	4.94%	2.99%
Deferred tax assets	2.08%	2.68%
Total current assets	41.36%	40.23%
Equity and other investments	8.02%	6.24%
Property and equipment, net	30.68%	29.57%
Goodwill, net	16.97%	19.01%
Other intangibles, net	2.74%	4.40%
Other noncurrent assets	0.23%	0.55%
Total assets	100.00%	100.00%
Liabilities and Stockholder’s Equity
Current liabilities
Accounts payable	4.37%	4.41%
Accrued expenses and other current liabilities	12.07%	13.51%
Current portion of long-term debt	23.12%	–
Deferred revenue	15.91%	15.52%
Total current liabilities	55.47%	33.43%
Noncurrent deferred tax liabilities	1.18%	0.54%
Other noncurrent liabilities	9.48%	12.96%
Total liabilities	66.13%	46.93%
Commitments and contingencies	–	–
Stockholders’ equity	–	–
Preferred stock, $100.00 par value, 750 shares authorized, no shares issued
Common stock, $0.50 par value,500,000 shares authorized, 32,338 shares issued as of December 31,2011,and 2010	7.05%	6.77%
Retained earnings	32.36%	53.89%
Common stock held in treasury, 5,048 shares in 2011 and 5,285 shares in 2010	(1.15%)	(1.06%)
Accumulated other comprehensive loss	(4.39%)	(6.53%)
Total stockholders’ equity	33.87%	53.07%
Total liabilities and stockholders’ equity	100.00%	100.00%

Income Statement

	2009	2010	2011
Revenue	$ 100%	$ 100%	$ 100%
Costs and expenses
Cost of revenue	51%	54%	52%
Selling, general and administrative	21%	19%	19%
Research and development	11%	10%	9%
Restructuring and reorganization	3%	–	–
Total costs and expenses	86%	83%	80%
Operating income	14%	17%	20%
Equity in net income of affiliate	2%	2%	2%
Impairment of investment	–	–	(1)
Income before interest and income tax expense	16%	18%	21%
Interest income	0%	0%	0%
Interest expense	0%	0%	0%
Income before income tax expense	16%	18%	21%
Income tax expense	5%	7%	8%
Net income	11%	11%	13%

Summary

DuPont analysis reveals that Company B is more profitable and efficient in managing assets and equity than Company B. This can be attributed to the fact that Company A has a high ratio of total to equity total assets of 87.33% in 2011. The company has a low ratio of total liabilities to total assets of 12.65% as of 2011. For company B, the ratio of total equity to total assets amounted to 56.93% in 2011 while the ratio of total liabilities to total assets was 46.07% in 2011. From the comparison, it is evident that Company B has higher leverage than Company A. This implies that the amount of net income from Company B is distributed to a large number of shareholders than in Company A thus yielding a high return on assets and return on equity (Brigham & Joel 2009; Eugene & Michael 2009). It is worth noting that the net profit margin for company A (16%) is greater than that of company B (13%). The gross profit margin for company A (35%) is greater than that of company B (48%). This reveals that company A is efficient in managing operating costs while company B is efficient in managing the cost of sales (McLaney & Atrill 2008; Atrill 2009).

References

Atrill, P. 2009, Financial management for decision-makers, Financial Times Prentice Hall, Harlow.

Brigham, F & Joel, F 2009, Fundamentals of financial management, South-Western Cengage Learning, USA.

Collier, P. 2009, Accounting for managers, John Wiley & Sons Ltd, London.

Eugene, F & Michael, C 2009, Financial management theory and practice, South-Western Cengage Learning, USA.

Fraser, G 2009, Decision accounting, Basil Blackwell Ltd, Oxford.

Haber, R 2004, Accounting demystified, American Management Association, New York.

Holmes, G & Sugden, 2008, Interpreting company reports, Financial Times/Prentice Hall, Harlow.

McLaney, E & Atrill, P 2008, Financial accounting for decision-makers, Prentice Hall Europe, Harlow.

Siddiqui, A. 2005, Managerial economics and financial analysis, New Age International (P) Limited, New Delhi.

Vance, D 2003, Financial analysis and decision making: Tools and techniques to solve, McGraw-Hill books, United States.