Accounting Auditing. April 2011

Transcription

1 Accounting 4117 Auditing April 2011 Randall Brunson Carolus Daniel Terrence Burden Mark Stump 1. Form a group of four persons. Discuss how you will organize (assign responsibilities) to complete this project in a suitable format. 2. Obtain a copy of a recent annual report of a publicly held company with stock actively traded on the New York, NASDAQ or other over-the-counter exchanges. Answer the following questions: a. What is the company's industry? Ford Motor Company is a global leader in the automotive industry. b. What are its primary products? Ford Motor Company s product line consists of a wide variety of automobiles from commercial trucks to fuel-efficient hybrid vehicles. Ford also offers financing through Ford Motor Credit. c. What raw materials does the company use? The primary raw material used in Ford s production is steel. However, petroleum products such as plastic and vinyl are becoming increasingly important in automotive manufacturing. d. How large is the company:

2 Sales o Automotive sales revenue for 2010 was $119,280,000,000. Revenue for their financial services division was $9,674,000,000. Assets o Total assets on December 31, 2010 were $164,687,000,000. Employees o Ford Motor Company has about 164,000 employees operating about 70 plants worldwide. e. Where is the company located? Ford s headquarters are located in Dearborn, Michigan. Ford distributes or manufactures vehicles on six continents. f. What other people/companies are closely associated with this company? Companies that are closely associated with Ford include company brands Lincoln/ Mercury, Mazda, and Volvo. Ford Motor Company offers financial services for both dealers and customers through Ford Motor Credit. Also owned by Ford, Genuine Parts and Service as well as Motorcraft provide part distribution and manufacturing. Ford is also closely associated with the United Auto Workers union. g. Look at the annual report: What image does it intend to convey? Ford s 2010 annual report portrays images related to its One Ford program. The program promotes unity within the company as well as with essential business partners in an effort to create an exciting and viable company with profitable growth for all. The annual report conveys an image of unity, innovation, and rebuilding. What are the segments and functional contents of the report? The report is segmented into the following sections: About the Company, A Message from the Executive Chairman, A Message from the President and CEO, Board of Directors and Executives, Great Products, Strong Business, Better World, Financial Contents, Shareholder Information, and Global Overview. Ford s annual report intends to convey a message of renewal and unity while informing the reader of financial positioning and a focused strategy for improvement. 3. Obtain a copy of the Company's 10-K report for the same date as the annual report.

3 How does the 10-K differ from the annual report? The major difference between the 10k filing and the annual report is the scope of the information provided. The 10k is an annual filing that public companies are required by law to send to the SEC and all the exchanges in which they are traded. The annual report contains colorful pictures and graphics that give an overview of the company s financial performance. The 10k in general is much longer, less accessible and gives a comprehensive detailed picture of the company s finances, risks opportunities and current operations. Some of the major parts of the 10k are as follows: An explanation of the company s operations and the markets where it currently operates. Automotive A. Ford North America B. Ford South America C. Ford Europe D. Ford Asia Pacific Africa Financial Services A. Ford Motor Credit B. Other Financial Services Disclosures of the company s risk, including current lawsuits. Increased price competition from industry overcapacity. Adverse effects from bankruptcy, insolvency and government restructuring of competitors. Fluctuations in foreign currency, exchange rates, commodities and interest rates. Single source supplier of components of materials Substantial levels of indebtedness preventing us from fulfilling Ford s debt obligations. Labor constraints and work stoppages Substantial pension and post retirement health care and life insurance liabilities impairing Ford s liquidity and financial condition. Several Class action lawsuits including Canadian Export antitrust. Property holdings Ford North America Plants 38 Warehouses and Distributing 30 Engineering and Research 45 Sales Offices 58 Ford South America Plants 8 Warehouses and Distributing 3 Engineering and Research 1 Sales Offices 8

4 Ford Europe Plants 15 Warehouses and Distributing 7 Engineering and Research 4 Sales Offices 24 Ford Asia Pacific Africa Plants 12 Warehouses and Distributing 1 Engineering and Research 11 Sales Offices 16 The company s accounting policies. Evaluations of disclosure controls and procedures. Management report on internal control over financial reporting. Material changes in internal control. Detailed explanation of the financial statements Report of independent registered accounting firm. Accompanying notes to the financial statements. The financial statement schedule. Operating leases that do not appear as debt on the balance sheet. Executive compensation Compensation discussion and analysis. Director compensation Compensation of executive officers Compensation committee report. Option exercised and stock vested in Pension benefits Non- qualified deferred compensation. Potential payments upon termination. The executive officers signed letters attesting to the accuracy of the books. Director, Chairman of the Board Chief Executive Officer Chair of the Audit Committee. Director of the Compensation Committee. Director of the Nominating and Governance Committee. Director of the Sustainability Committee. Vice President and Controller In conclusion the 10k filing gives a complete explanation of the company s financials, the industry as a whole and the economic factors effecting Ford. All information is provided in comprehensive report portrayed in set types mandated by the Securities and Exchange Commission. The 10k is a formal document that does not provide for marketing or positive propaganda. Its purpose is to communicate the position of a company for a particular year and provide full disclosure to shareholders.

5 4. Obtain outside information about the company and its industry. Answer the following questions: a. What are the key economic factors about the industry? The automotive manufacturing industry was among the most severely affected by the global economic recession. Both General Motors Corporation and Chrysler LLC needed government bailout loans to stay afloat during the economic downturn. Consumer demand for vehicles and consumer confidence plummeted to the lowest levels seen in decades. Reduced availability of credit from banks and other lenders has also had an adverse effect on sales revenue for vehicle manufacturers. The few consumers that are purchasing vehicles have shifted their demand from trucks and SUVs to smaller, more fuelefficient vehicles. Only very recently have sales numbers shown signs of recovery from the economic slump. b. Where is the company in its life cycle? Ford has managed to weather the global recession fairly well and has been able to gain market share in recent years. This allows Ford Motor Company to remain in the maturity stage of its company life cycle. c. What are the five or six most important factors for success in this business? The following factors are essential in maintaining sustainability in the automotive industry: The company must maintain a positive image in the public s view. Automakers must possess a strong distribution network for its vehicles. Automotive manufacturers must create positive cash flow. The firm must demonstrate compliance with applicable standards for fuelefficiency, emissions, and safety. Automobile producers must exhibit flexibility in their ability to adapt to changing customer demand. d. How does this company stand with respect to these factors? An American icon for over a century, Ford has built a strong reputation for dependability and quality in most markets. This has been reflected in their recent gains in market share in the U.S., Europe, and other areas. Having once been burdened by a surplus of dealers, Ford has streamlined its distribution network to be efficient and in sync with market demand.

6 Having reduced automotive debt by $14.5 billion in 2010, and ending the year with automotive gross cash exceeding debt by $1.4 billion, Ford has generated positive cash flow that places the company in a strong financial position. Ford has demonstrated the ability to exceed emission and safety standards in almost all of its vehicles. Additionally, Ford has placed an increased emphasis on improved fuel-efficiency to appeal to consumer demand. Ford transformed its Michigan Assembly Plant, formerly a truck and large SUV manufacturing compound, to facilitate production of the newly redesigned Focus and Focus Electric, as well as other fuel-efficient models. Ford is poised to adapt to changes in consumer demand. e. Describe four or five key business risks related to the client s business and industry. Business risks that are associated with vehicle manufacturing include the following: Safety liability and the potential for lawsuits are constant threats to automotive manufacturers. Warranties pose a significant financial hazard for automakers. With the level of resources involved in the production and promotion of a vehicle, vehicle manufacturers must be sure there is a viable market for their offerings, otherwise significant financial damage can occur. Vehicle recalls can be required for a variety of reasons, and can be very costly for an automotive firm. f. What notable accounting considerations are there for companies in this industry? Notable accounting considerations associated with the automotive industry include: Companies in the auto components industry are fixed asset intensive, making depreciation a significant expense for most of these companies. Accounting for this expense can have considerable effect on a company s performance. Inventory represents one of the most substantial assets on the balance sheets of automobile companies and is a leading indicator of financial condition. Therefore, a company's choices with respect to inventory accounting can have a significant impact on a company's results. Companies rely upon estimates to calculate the appropriate provision and allowance for doubtful accounts related to potentially uncollectible accounts receivable. The warranty reserve that a company accrues is an estimate that is generally based on past warranty claims experience, an assessment of product quality versus prior periods, current claims, production changes, industry developments and other considerations. These estimates can have significant effects on the financial statements.

7 g. What legal or regulatory matters are of concern? The primary legal concern affecting automotive manufacturers is liability for the safety of passengers in their vehicles. Related lawsuits can be extremely detrimental to a company. Additionally, regulations enforcing standards for safety and emission levels, as well as fuel-efficiency, are of utmost importance to automakers. h. What social matters are of concern? The key social matter facing the automotive industry revolves around its close association with the pollution problem. Automotive plants have faced protest stemming from their products contribution to increasing levels of carbon dioxide in the atmosphere. Additional concern has risen as a result of automakers policies concerning labor and the payment of their workers both in the U.S. and abroad.