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 amounts 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 dimistified, 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.

Appendix

Common Sized balanced sheets and income statements

Company A

	2010	2010	2011	2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$ 348,349,773	34.74%	$ 357,986,774	30.44%
Short-term investments	86,447,596	8.62%	60,808,237	5.17%
Accounts receivable	95,647,612	9.53%	110,389,715	9.38%
Inventories	100,728,730	10.04%	188,753,312	16.05%
Prepaid expenses and other	24,095,563	2.40%	34,354,946	2.92%
Total current assets	655,269,274	65.35%	752,292,984	63.96%
PLANT AND EQUIPMENT:
Land, buildings and improvements	120,578,714	12.02%	130,290,789	11.08%
Machinery and equipment	352,618,391	35.16%	415,394,183	35.32%
Construction-in-progress	13,351,954	1.33%	58,244,561	4.95%
	486,549,059	48.52%	603,929,533	51.35%
Less-Accumulated depreciation and	(281,441,303)	(28.06%)	(321,387,945)	(27.32%)
	205,107,756	20.45%	282,541,588	24.02%
OTHER ASSETS:
Long-term investments	129,091,167	12.87%	128,168,165	10.89%
Patents and other assets, net	13,222,442	1.318%	13,024,265	1.10%
	142,313,609	14.19%	141,192,430	12.00%
	$ 1,002,690,639	100%	$ 1,176,027,002	100%
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
CURRENT LIABILITIES:
Accounts payable	$ 40,295,464	4.01%	$ 65,470,573	5.56%
Accrued liabilities:
Salaries, wages and vacation	5,724,818	0.57%	6,558,638	0.55%
Royalties	4,988,132	0.49%	6,745,877	0.57%
Dividends declared	15,652,134	1.56%	17,288,348	1.470063865
Other	5,428,081	0.54%	4,631,064	0.39%
Total current liabilities	72,088,629	7.18%	100,694,500	8.56%
DEFERRED INCOME TAXES	37,071,184	3.69%	48,213,981	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	8,537,528	0.85%	8,644,174	0.73%
issued and outstanding in 2011 and 142,292,127 shares issued and outstanding in 2010		0
Additional paid-in capital	347,834,218	34.69%	395,229,891	33.60%
Retained earnings	514,842,177	51.34%	610,702,253	51.92%
Accumulated other comprehensive income:
Unrealized gain on investments	21,750,000	2.16%	10,412,246	0.88%
Cumulative translation adjustment	566,903	0.06%	2,129,957	0.18%
Total shareholders’ investment	893,530,826	89.11%	1,027,118,521	87.34%
	$ 1,002,690,639	100%	$ 1,176,027,002	100%

Income statement

	2009	2009	2010	2010	2011	2011
Net sales	$ 544,522,993	100%	$ 816,263,414	100%	$ 1,023,762,049	100%
Cost of goods sold	366,968,216	67	520,573,101	64	662,181,714	65%
Gross profit	177,554,777	33%	295,690,313	36%	361,580,335	35%
OPERATING EXPENSES:
Engineering, research and development	47,128,086	9%	64,100,411	8%	81,634,158	8%
Selling, general and administrative	35,807,622	7%	40,617,833	5%	48,578,252	5%
Total operating expenses	82,935,708	15%	104,718,244	13%	130,212,410	13%
Income from operations	94,619,069	17%	190,972,069	23%	231,367,925	23%
OTHER INCOME (EXPENSE)
Investment income	3,321,853	1%	2,901,956	0%	4,165,809	0%
Impairment loss on available-for-sale securities	(1,290,590)	(0)	–	–	–	–
Other, net	(298,029)	(0%)	9,565,989	1%	8,898,077	1%
Total other income (expense)	1,733,234	0%	12,467,945	2%	13,063,886	1%
Income before provision for income taxes	96,352,303	18%	203,440,014	25%	244,431,811	24%
Provision For Income Taxes	31,715,218	6%	65,706,045	8%	79,763,583	8%
NET INCOME	64,637,085	12%	137,733,969	17%	$ 164,668,228	16%

The table below shows vertical analysis report for company B

Balance sheet

	2010	2010	2011	2011
ASSETS
Current assets
Cash and cash equivalents	$ 18,925	8.26%	$ 19,715	8.25%
Trade accounts receivable, net of allowance for doubtful accounts of $4,615 in 2011 and $4,708 in 2010	59,808	26.09%	62,886	26.32%
Prepaid expenses and other current assets	11,332	4.94%	7,141	2.99%
Deferred tax assets	4,758	2.08%	6,398	2.68%
Total current assets	94,823	41.36%	96,140	40.23%
Equity and other investments	18,385	8.02%	14,913	6.24%
Property and equipment, net	70,332	30.68%	70,651	29.57%
Goodwill, net	38,895	16.97%	45,430	19.01%
Other intangibles, net	6,272	2.74%	10,526	4.40%
Other noncurrent assets	534	0.23%	1,308	0.55%
Total assets	229,241	100.00%	238,968	100.00%
Liabilities and Stockholder’s Equity
Current liabilities
Accounts payable	$ 10,007	4.37%	$ 10,534	4.41%
Accrued expenses and other current liabilities	27,670	12.07%	32,276	13.51%
Current portion of long-term debt	53,000	23.12%	–	–
Deferred revenue	36,479	15.91%	37,080	15.52%
Total current liabilities	127,156	55.47%	79,890	33.43%
Noncurrent deferred tax liabilities	2,695	1.18%	1,302	0.54%
Other noncurrent liabilities	21,739	9.48%	30,960	12.96%
Total liabilities	151,590	66.13%	112,152	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	16,169	7.05%	16,169	6.77%
Retained earnings	74,184	32.36%	128,772	53.89%
Common stock held in treasury, 5,048 shares in 2011 and 5,285 shares in 2010	(2,642)	(1.15%)	(2,524%)	(1.06%)
Accumulated other comprehensive loss	(10,060)	(4.39%)	(15,601%)	(6.53%)
Total stockholders’ equity	77,651	33.87%	126,816	53.07%
Total liabilities and stockholders’ equity	$ 229,241	100.00%	$ 238,968	100.00%

Income statement

	2009	2009	2010	2010	2011	2011
Revenue	$ 384,952	$ 100%	$ 395,379	$ 100%	$ 422,310	$ 100%
Costs and expenses
Cost of revenue	196,269	51%	215,329	54%	220,381	52%
Selling, general and administrative	81,866	21%	75,255	19%	78,407	19%
Research and development	42,008	11%	39,145	10%	38,416	9%
Restructuring and reorganization	9,968	3%	–	–	–	–
Total costs and expenses	330,111	86%	329,729	83%	337,204	80%
Operating income	54,841	14%	65,650	17%	85,106	20%
Equity in net income of affiliate	7,637	2%	7,092	2%	7,255	2%
Impairment of investment	–	–	–	–	(3,477)	(1)
Income before interest and income tax expense	62,478	16%	72,742	18%	88,884	21%
Interest income	49	0%	14	0%	27	0%
Interest expense	1,395	0%	984	0%	564	0%
Income before income tax expense	61,132	16%	71,772	18%	88,347	21%
Income tax expense	18,972	5%	27,294	7%	35,056	8%
Net income	42,160	11%	44,478	11%	53,291	13%

The table below shows horizontal analysis report for company A

Balance sheet

	2010	2010	2011	2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$ 348,349,773	100%	$ 357,986,774	102.76%
Short-term investments	86,447,596	100%	60,808,237	70.34%
Accounts receiveable	95,647,612	100%	110,389,715	115.41%
Inventories	100,728,730	100%	188,753,312	187.38%
Prepaid expenses and other	24,095,563	100%	34,354,946	142.57%
Total current assets	655,269,274	100%	752,292,984	114.80%
PLANT AND EQUIPMENT:
Land, buildings and improvements	120,578,714	100%	130,290,789	108.05%
Machinery and equipment	352,618,391	100%	415,394,183	117.80%
Construction-in-progress	13,351,954	100%	58,244,561	436.22%
	486,549,059	100%	603,929,533	124.12%
Less-Accumulated depreciation and	(281,441,303)	100%	(321,387,945)	114.19%
	205,107,756	100%	282,541,588	137.75%
OTHER ASSETS:
Long-term investments	129,091,167	100%	128,168,165	99.28%
Patents and other assets, net	13,222,442	100%	13,024,265	98.50%
	142,313,609	100%	141,192,430	99.21%
	$ 1,002,690,639	100%	$ 1,176,027,002	117.28%
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
CURRENT LIABILITIES:
Accounts payable	$ 40,295,464	100%	$ 65,470,573	162.47%
Accrued liabilities:
Salaries, wages and vacation	5,724,818	100%	6,558,638	114.56%
Royalties	4,988,132	100%	6,745,877	135.23%
Dividends declared	15,652,134	100%	17,288,348	110.45%
Other	5,428,081	100%	4,631,064	85.31%
Total current liabilities	72,088,629	100%	100,694,500	139.68%
Deferred income taxes	37,071,184	100%	48,213,981	130.05%
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	8,537,528	100%	8,644,174	101.24%
issued and outstanding in 2011 and 142,292,127 shares issued and outstanding in 2010
Additional paid-in capital	347,834,218	100%	395,229,891	113.62%
Retained earnings	514,842,177	100%	610,702,253	118.61%
Accumulated other comprehensive income:		100%
Unrealized gain on investments	21,750,000	100%	10,412,246	47.87%
Cumulative translation adjustment	566,903	100%	2,129,957	375.71%
Total shareholders’ investment	893,530,826	100%	1,027,118,521	114.95%
	$ 1,002,690,639	100%	$ 1,176,027,002	117.28%

Income statement

	2009	2009	2010	2010	2011	2011
Net sales	$ 544,522,993	$ 100%	$ 816,263,414	150%	$ 1,023,762,049	188%
Cost of goods sold	366,968,216	100%	520,573,101	142%	662,181,714	180%
Gross profit	177,554,777	100%	295,690,313	167%	361,580,335	204%
OPERATING EXPENSES:
Engineering, research and development	47,128,086	100%	64,100,411	136%	81,634,158	173%
Selling, general and administrative	35,807,622	100%	40,617,833	113%	48,578,252	136%
Total operating expenses	82,935,708	100%	104,718,244	126%	130,212,410	157%
Income from operations	94,619,069	100%	190,972,069	202%	231,367,925	245%
OTHER INCOME (EXPENSE)
Investment income	3,321,853	100%	2,901,956	87%	4,165,809	125%
Impairment loss on available-for-sale securities	(1,290,590)		–	–	–	–
Other, net	(298,029)	100%	9,565,989	(3,210%)	8,898,077	(2,986%)
Total other income (expense)	1,733,234	100%	12,467,945	719%	13,063,886	754%
Income before provision for income taxes	96,352,303	100%	203,440,014	211%	244,431,811	254%
Provision For Income Taxes	31,715,218	100%	65,706,045	207%	79,763,583	251%
NET INCOME	64,637,085	100%	137,733,969	213%	$ 164,668,228	255%