Financial Decision Making

All posts in the Financial Decision Making category

Summer Vacation

Published June 30, 2016 by Mayrbear's Lair

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“Love is such a deep gratitude. When you are truly in love with life, every breath you take is gratitude.”

― Bryant McGill

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2 organizational management business skills publications nov 2014

For more information on Media Magic’s digital publications, or to purchase any of our Business Life audio book titles, please visit amazon.com’s “Author Central” to view:

 Mayr’s Author’s Page

Business Issues and Ethical Resolutions (Conclusion)

Published March 6, 2015 by Mayrbear's Lair

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In today’s highly competitive market place, strategic business leaders in the online gaming environment are having to consider more than just the legal aspects involved in their decision making process. According to Boatright, many corporate bosses have discovered that reliance on the law alone can prove to be disastrous (Boatright, 2009). In this situation, leaders in the online gaming industry must consider that although the commercial use of sex, violence, and gambling are accepted in the US, it is only accepted in certain markets that are clearly identified for mature audiences. Therefore, adding a new element to a successfully established product can in fact, introduce more restrictions in their marketplace. The question these leaders face is whether to include adult content, which will most likely to change their share of the market place, especially if the management team does not conduct extensive market research or create a focus group to test out this new strategy. On the other hand this new tactic may open other markets on a global level where the restrictions are less binding.

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The bottom line is that each individual leader needs to identify where the majority of their profits are being generated to help them make the best decision to achieve their goals. Once leaders have gathered data from a screening process, they will have a better indication of what aspects each market responds to, which puts leaders in a better place to make the most effective decisions. In conclusion, because of the wide diversity in beliefs, morals, and principles that vary from market to market, what some consider immoral in one country, may be perfectly natural to others from another region. Leaders need to determine the culture of the territory they wish to distribute their products in so that in the long run, their decisions do not conflict with the legal and ethical values of their marketplace so that their organization can continue to enjoy success without losing their integrity.

That’s a wrap for today. Until next time … stay organized!

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Live one day at a time emphasizing ethics rather than rules. – Dr. Wayne Dyer

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For more information on Media Magic’s digital publications, or to purchase any of our Business Life audio book titles, please visit amazon.com’s new feature called “Author Central” to view:

Mayr’s Author Page

References:

Boatright, J. (2009). Ethics and the Conduct of Business (Sixth ed.). Upper Saddle River, NJ: Pearson Education, Inc.

Ferrell, Fraedrich, & Ferrell. (2013). Business ethics and social responsibility (9th ed.). Mason, OH: Cengage Learning.

 

Personal Ethics VS Business Ethics

Published March 2, 2015 by Mayrbear's Lair

Ethics

As a rule, most people have a set of values and principles that help guide them throughout their lives. As an individual becomes educated and because of life’s experiences, however, these rules can change, evolve, and are adapted to help make sense to our own perceptions of reality. In the book Ethics: A Very Short Introduction, Blackburn (2001) contends that human beings in general are ethical animals who judge, evaluate, compare, admire, make claims, and justify their actions (Blackburn, 2001). In most cases, leaders must draw from their own principles and values to help them make the best decision for the organization they represent.

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Laws are created to enforce rules and regulations so that there is a model in which citizens can shape their behavior and choices. For example, stop signs at small intersections communicate traffic laws to help people avoid harm. In Business Ethics and Sustainability, Ng’s (2012) research purports that laws provide a starting point and offer the minimum standards to help individuals understand proper and improper behavior. However, these laws are inherently different from morality issues (Ng, 2012). For example, it is not illegal to engage in extra marital affairs, but society deems that this behavior is morally wrong.

Morality is considered a society’s norms and values. Ethics consequently is the identification and analysis of moral values and how they are applicable in any given situation. In a business arena, although personal ethics can help guide decision makers – managers face many issues that require both knowledge and wisdom to help them to analyze the ethical and legal aspects of a situation. In short, today’s leaders must use their personal judgment based on their own moral values and principles to make the best decision for their company. A wrong decision can affect the future success of an organization and the people that rely on the company for their livelihoods.

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As each situation rises, employers face making decisions on an ethical course of action they can rely on and in some degree must pull from the rules of right conduct they employ in everyday life. In the book, Ethics and the Conduct of Business, Boatright (2009) suggests that managers need to identify the appropriate level for a decision because ethical problems may have no solution on the level at which they are approached (Boatright, 2009). In other words, sometimes ethical problems can be solved only by displacing them to a different level because some difficult situations cause distress that can only be resolved by looking at some less than perfect response from a lower level.

For example, as a survivor of abuse, when I first entered the workforce as a young adult, I did so from a place of low self-esteem and self-efficacy. At that time, I did not have the tools to make the best choices when questionable situations arose with respect to issues of morality. Because I was conditioned to respond from a place of “survival” in a supporting role, rather than respond with the knowledge and wisdom, of a seasoned leader, I did not have the training to make the best choices. In some cases, rather than do the right thing and report the unethical situations, because of job security I remained silent. However, as I matured and received higher levels of education, I developed healthier levels of confidence and self-esteem. When unethical situations arise now, I am one of the first to expose the situation to help bring about positive change. I realized that by keeping silent, I was only enabling the misconduct of others.

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Employers that embrace a Utilitarian approach to ethics with the mindset that the “behavior justifies the means to an end” set themselves up as separatists and create situations that can result in a fatal disaster the kind the ENRON community faced. In that situation, executives believed that in order to continue creating high levels of profit, their illegal and immoral behavior was justified because of their utilitarian views.

In their publication, Business Ethics and Social Responsibility, Ferrell et al. (2013) remind us that values are used to help develop norms that are socially accepted and include integrity, accountability and trust (Ferrell, Fraedrich, & Ferrell, 2013). These are examples of values that help guide people to make better decisions, which in turn build trust from employees, consumers, shareholders, and the public. By adopting high levels of ethics and moral values, people live better lives based on respect, gratitude, and appreciation, while taking responsibility for their actions. In the long run, organizations that adopt ethical practices experience higher levels of success. That in itself is reason enough to engage in a code of ethics that embrace best practice policies.

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”Real integrity is doing the right thing, knowing that nobody’s going to know whether you did it or not.” — Oprah Winfrey

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On sale now

For more information on Media Magic’s digital publications, or to purchase any of our Business Life audio book titles, please visit amazon.com’s new feature called “Author Central” to view:

Mayr’s Author Page

References:

Blackburn, S. (2001). Ethics: a very short introduction. New York, NY: Oxford Press.

Boatright, J. (2009). Ethics and the Conduct of Business (Sixth ed.). Upper Saddle River, NJ: Pearson Education, Inc.

Ferrell, Fraedrich, & Ferrell. (2013). Business ethics and social responsibility (9th ed.). Mason, OH: Cengage Learning.

Ng, T. (2012). Business ethics and sustainability. Toronto, Ontario, Canada: Obiter Dicta.

Thanks Giveaway Sweepstakes!

Published November 12, 2014 by Mayrbear's Lair

thanks giveaway

Media Magic is happy to announce our first Giving of Thanks, Audiobook series Giveaway to celebrate this season of gratitude and appreciation for everyone’s continued support. Plus, they make great holiday gifts for business professionals!

To participate, simply send an email with GIVEAWAY in the subject line. Then submit your name in the body of the email and send it to us at: 

mediamagick@yahoo.com.

It’s that simple! Then, at the end of November, we will award ten lucky winners the entire collection of our accelerated learning business life audio book series! Good luck everyone!

business life ad Oc 2014

If you are interested in more tips on enhancing your leadership skills; are interested in more information on effective strategic planning; or just want to find out how to purchase any of our accelerated learning Business Life titles, please visit our website at:

Media Magic Publishing.

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The roots of all goodness lie in the soil of appreciation for goodness. – Dalai Lama

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Celebrating Graduation Day!

Published April 1, 2014 by Mayrbear's Lair

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It’s official … I completed my requirements and graduated with high honors from Ashford University’s Master of Arts program in Organizational Management. This is a remarkable achievement for me! In truth, I have experienced so many setbacks that I lacked inner confidence and wasn’t sure I would be able to accomplish this daunting task, let alone excel. It just goes to show you … it’s never too late to set new goals and go after them with passion and enthusiasm. I can tell you one thing I’ve learned for sure: You never know what you can achieve until you try!

Ashford Diploma

Now that I have my Masters Degree, the focus of this blog will shift to how my new skills and higher level of education are affecting and shaping my life, both personally and professionally. So, with grad school behind me, the next order of business is to focus on my start-up, Media Magic. For more information, please click on the image or link below to watch a short intro video I produced for Media Magic in association with Elinofotios Productions.

2013 MM Logo

An Intro To Mayr’s Media Magic

In the meantime, on Wednesday I will post another quick video that provides the Media Magic back-story and on Friday I will wrap the week up with one more video short on Media Magic’s recent project and will disclose what’s on the horizon for the creation station.

Thanks for staying on board this journey with me as I continue to evolve and create new post-degree opportunities and adventures!

Stay tuned … the fun is just getting started!

“Remember that you not only have the right to be an individual, you have an obligation to be one.”  – Eleanor Roosevelt

EMI Music: A Financial Analysis (Conclusion)

Published January 17, 2014 by Mayrbear's Lair

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Capital Structure

The nature of a company is mostly determined from the proportion of debt they have relative to their equity. This is known as the company’s capital structure and it reveals how much debt is outstanding and how well the debt was serviced. Understanding EMI’s corporate capital structure helps identify the most available options that management can pursue to reach successful outcomes by their use for example, of financing strategies from their equity as opposed to financing with debt; each have different effects on the long-term health of a company’s financial condition (How to determine your capital structure, n.d.). Due to the economic state of the industry, EMI faced considerable financial challenges during this period with £3038 million in outstanding debt and payment due dates scheduled between 2014 and 2017. The financial notes disclosed that EMI was able to generate adequate cash to service their interest payments on borrowings, however, the company still faced issues with respect to the steady tightening of financial support because of banking policies. In the meantime, due to the restructuring strategy, EMI’s debt had unlimited equity cure rights. This allowed shareholders to contribute additional funds as necessary to ensure the company met their requirements. For example, when Terra Firm purchased the firm they injected an additional £105 million in equity funding to meet their commitments. This indicated to shareholders EMI’s continued dedication to achieving successful outcomes.

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Profitability

The financial statements from a company’s Annual Report can help analysts determine consistent trends in the company’s earning to determine the level of profitability. Loth (2013) postulates that there are four levels of profit margins: (a) gross profit, (b) operating profit, (c) pretax profit, and (d) net profit that help determine a firm’s profitability (Loth, 2013). EMI’s report divulged that the firm faced considerable risks including uncertain economic global conditions that resulted in a declining market for recorded music products. This added pressure to bring down the pricing of music products which also played a role in the reduction of their profit margins. Additional risks they faced included their dependency on identifying, signing, and retaining artists with long term potential as well as the continued success of their current roster. Furthermore, their business was reliant on discovering and exploiting new income streams due to revenue losses from such occurrences like illegal music downloads and sharing, as well as the eventual erosion of copyright protection that introduced concerns of potential exploitation of their intellectual property and publishing assets.

In spite of these conditions, EMI Music experienced phenomenal success during that period due to their release of the Beatles Remastered Collection. This was the company’s bestselling project and broke multiple chart records globally including the most simultaneous titles released by a single artist. This proved to be one of most beneficial outcomes they achieved that resulted from their effective consumer insight and marketing strategies.  It also changed the way EMI developed and promoted their music products to drive sales. This improved their EBITDA by 15% to £184 in 2010 from £160 in 2009. In the meantime, EMI Music Publishing also experienced a 13% increase in profits going from £150 in 2009 to £184 in 2010 which consisted of some of the best songs and songwriters in the world. In addition, EMI worked diligently to create new relationships with brands and businesses to support their music products.  As a result, they reported sharp increases in licensing revenue from a variety of media outlets and continued diversifying their publishing revenue streams.  This strategy proved effective in enabling the firm to maintain growth during a period of economic downturn.

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Outlook for EMI

EMI’s financial statements provided significant information that revealed their financial condition and overall performance to help forecast their future. Friedlob and Welton (2008) explained that annual reports not only clarify how well a company is performing they can also help strategists predict the direction they are headed (Friedlob & Welton, 2008). The major question in the outlook of the EMI’s liquidity was their ability to produce cash from operations. As the statements revealed, the condition of the changing music industry was partially to blame for a depressed economical state. However, in a world where music is ubiquitous with demand from consumers and businesses growing at lightning speed, EMI seized the opportunity to expand and continued to deliver successful outcomes for the company and the artists they represent. New music remained at the core of their operations with the discovery and development of new talent as an essential component to the future and continued growth of the firm.

Exhibit H Income Statement

Exhibit H

The significant operational performance, together with equity injections provided by the company shareholders enabled EMI to meet their ongoing needs for working capital and debt service obligations. However, due to banking facility covenants based on debt/EBITDA that decreased significantly each year, there were concerns over these progressively difficult conditions for EMI to achieve their required ratios. This meant that they experienced shortfalls to financial commitments and (due to the continual tightening of the financial covenants) they anticipated ongoing issues to occur. The principal concern was whether additional equity funding would be available in future periods to enable the firm to comply with their financial requirements under the banking policies. For example, EMI’s income statement revealed (see Appendix H) that the group incurred a net loss of £512 during the period ending 2010. At that time, the firm’s current liabilities exceeded their current assets by £3,255 which resulted from the reclassification of bank loans from non-current liabilities to current liabilities. In other words, the ability of the company to continue was an ongoing concern because of their dependency from the continued availability of existing banking facilities, which required the firm to comply with their policies.

Bright Future Ahead

Bright Future Ahead

Conclusion

The elements presented in EMI’s Annual Report helped provide a more transparent image of the company’s activities and overall functionality. The notes also disclosed that the profits before impairment and restructuring costs increased 34% from £143 in 2009 to £192 in 2010 and the cash they generated from operations increased 42% from £192 in 2009 to £273 in 2010. This meant that their enhanced operational performance, together with equity injections, provided EMI with enough revenue to meet their capital needs and debt obligations. The findings of this research deduced that EMI’s financial statements were indicative of a high level of financial reporting and provided a true and fair picture of the firm’s financial condition. In conclusion, the report revealed that EMI’s operating performance improved considerably during that period and provided shareholders sufficient evidence to give them confidence in the firm’s future performance abilities.

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This concludes my research work on the financial analysis series in organizational management. Thank you everyone for being a part of this journey. Although this is the last post in this blog series, stay tuned for upcoming articles that reveal my current research work in the application of strategic management where I will provide a close analysis that reveals the strategic management tactics successful companies like Apple, Disney, and Starbucks incorporate that are significant in their achieving and maintaining the long term mega success status they continue to enjoy in the marketplace.

Thanks again for sharing this experience with me. I hope you were able to find something of value to enhance your own experiences, both personally and professionally, as I have.

Stay tuned …

Until then, I bid you adieu my friends …

Mayr

References

(2011). EMI annual review 2009/2010. Finances. Hollywood: Maltby Capital Ltd.

The Johnny Mercer Research Guide. (2012). Retrieved October 30, 2013, from The Johnny Mercer Foundation: http://www.johnnymercerfoundation.org/initiatives-charities/for-researchers/johnny-mercer-research-guide/

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Friedlob, G., & Welton, R. (2008). Keys to reading annual report. Hauppauge, NY: Barron’s Educational Series.

Loth, R. (2013). Profitability indicator ratios: Profit margin analysis. Retrieved December 5, 2013, from investopedia.com: http://www.investopedia.com/university/ratios/profitability-indicator/ratio1.asp

How to determine your capital structure. (n.d.). Retrieved December 5, 2013, from Structuringfinance.com: http://www.structuringfinance.com/capital-structure/how-to-determine-your-capital-structure

Roth, R. (2008). The writers guide to annual reports. Atlanta, GA: Booksurge.com.

Scherreik, S. (2002, December 22). How efficient is that company? Retrieved December 5, 2013, from businessweek.com: http://www.businessweek.com/stories/2002-12-22/how-efficient-is-that-company

EMI Music: A Financial Analysis (Part 2)

Published January 15, 2014 by Mayrbear's Lair

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Short Term Liquidity

Even though PR fluff can misrepresent the true nature of a company’s financial condition, the statements from their annual reports provide sufficient data to help analysts discover the truth about a company’s financial health and overall performance. Fraser and Ormiston (2010) assert that examining a firm’s short term liquidity can give insight into their ability to meet cash demands (Fraser & Ormiston, 2010). EMI’s financial overview charts revealed (see Exhibit A) that during this accounting period the firm had a prosperous year, especially given the economic condition of the music industry in the global marketplace.  For example, EMI delivered worldwide revenues of about £1.65 billion and showed increased levels in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of 14% from £293 million reported in 2009 that rose to £334 in 2010. The Chairman’s statement revealed it resulted from the efforts of the firm’s restructuring strategy that commenced in 2007 when EMI was acquired by the Terra Firma Corporation. The merger implemented innovative new management plans to make the company more relevant to developers and consumers of music alike. The Terra Firma alliance proved effective revealing impressive EBITDA levels that jumped almost 400% from £68 million in 2007 to £334 million in 2010. The acquisition also helped reduce the cost base of the corporation allowing EMI to benefit in both earnings and cash flow in spite of their streamlining tactics.

Exhibit A Chart

Exhibit A

In the meantime, EMI’s receivables (see Exhibit B) decreased from £577 (in the millions) in to 2009 to £564 in 2010, with inventories also decreasing from £27 in 2009 to £25 in 2010 (see Exhibit C). This decrease resulted from the company having written down inventories by £10. The notes revealed this was because of the global economic slowdown at the time and the general uncertainty in reduction to the market estimates of growth from digital and online music markets, as well as the continual rapid decline of the physical market. Due to this condition, management concluded there was sufficient doubt over the recoverability of the carrying value of certain intangible assets. As a result, an impairment review of the music catalogs was conducted which ended in a reduction of the carrying values of goodwill and intangible assets from amortization and impairment charges.

Exhibit B Receivables

Exhibit B

Exhibit C Inventories

Exhibit C

The statements also revealed that EMI’s financial liabilities totaled £3,662 (see Exhibit D) having dipped a bit from the 2009 figure of £3,811 which decreased partly due to the foreign-exchange rate at the time. The shareholder loan figure increased to £398 million in 2010 from £346 in 2009. The notes revealed this increase was due to accrued interest charges. Cash and cash equivalents in the meantime (see Exhibit E), showed an upward trend rising from £336 in 2009 to £343 in 2010. This was because their cash earned interest at a floating rate based on the daily bank deposit rates. Short-term deposits, for example were made for periods that varied between one day and one month, which sometimes extended up to three months.

Exhibit D Financial Liabilities

Exhibit D

Exhibit E Financial Position Statement

Exhibit E

Exhibit F

Exhibit F

Additional evidence of short-term liquidity was revealed from the financial ratio trends in comparison with industry averages. For example, quick ratios revealed an upward trend reporting a loss of (4.8) times in 2009 to (1.3) times in 2010. This indicated they were in a stronger position, especially considering the music industry drifts that they and other companies were up against as well during that time. The cash flow liquidity ratios also increased from a loss of (.25) times reported in 2009 that jumped to in 2010 to a loss of (.10) times indicating an improvement in their short-run solvency. These figures revealed that EMI experienced steady improvement generating cash from their operations and that they did not have major problems with short-term liquidity during that reporting period (see Exhibit F).

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Operating Efficiency

The financial statements from a company’s annual report also provide data that help analysts determine the operating efficiency of the firm. One way to accomplish this is by examining the firm’s turnover ratios. Scherreik (2002) suggested that in order for companies to run effectively, they must keep costs to a minimum and reduce their need to seek loans. One way to achieve this is to trim down inventories and speed up the collection of outstanding payments (Scherreik, 2002). EMI’s financial statements disclosed that their operational performance continued to improve after the acquisition of the company by Terra Firma. For example, EBITDA figures, excluding restructuring, increased from £68 in 2007 to £334 in 2010 (see Exhibit A). In addition, operating results increased by almost 200% when in 2007 they reported a loss of £135 million then showed a profit of £121 million in 2010. This was accomplished in spite of the global economic crisis. Furthermore, the firm was able to maintain steady revenue increases and successfully launched a variety of new music from artists including Katy Perry, Lady Antebellum, and Cold Play. In the meantime, even though their global recorded music market share increased from 1.0% in 2009 to 10.4% in 2010, the firm was still challenged by an overall decline in physical sales that was not offset by growth in digital sales. Due to the market decline, EMI Music continued to develop its strategy of diversifying their revenue streams into areas like merchandising, live recordings, and other innovative digital platforms. In addition, they continued to extend their reach and income streams for their artists’ and their videos through a variety of new distribution partnerships.

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Publishing revenues on the other hand, remained robust and continued to excel in the discovery of new music with an unmatched ability to find and nurture the very best songwriting talent. EMI appeared to have managed the company efficiently during this period with the Music division having achieved operating margins that rose from 14.5% in 2009 to 15.7% in 2010. The publishing division showed an improvement of 15% in EBITDA from the £184 million reported from the 2009 to 2010 period which reflects a margin increase of 13% from £133 to £150 million (see Exhibit G). These figures indicate that their operating margin rose from 28% in 2009 to 31% in 2010. The notes revealed this was partially due to revenues collected from mechanical royalties of CDs, DVDs and digital download sales; performance royalties from radio, TV, webcasts, and concerts; synchronization royalties from the use of music in TV, films, computer games and commercials; as well as other uses including ringtones, mobile products, stage productions, and sheet music. Based on this evidence it appeared that EMI was operating efficiently during that time because they continued to collect revenue, show improvement, and had enough cash on hand to meet their short term demands.

Exhibit G Music and Publishing Operational Performance Statement

Exhibit G

References

(2011). EMI annual review 2009/2010. Finances. Hollywood: Maltby Capital Ltd.

The Johnny Mercer Research Guide. (2012). Retrieved October 30, 2013, from The Johnny Mercer Foundation: http://www.johnnymercerfoundation.org/initiatives-charities/for-researchers/johnny-mercer-research-guide/

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Friedlob, G., & Welton, R. (2008). Keys to reading annual report. Hauppauge, NY: Barron’s Educational Series.

Loth, R. (2013). Profitability indicator ratios: Profit margin analysis. Retrieved December 5, 2013, from investopedia.com: http://www.investopedia.com/university/ratios/profitability-indicator/ratio1.asp

How to determine your capital structure. (n.d.). Retrieved December 5, 2013, from Structuringfinance.com: http://www.structuringfinance.com/capital-structure/how-to-determine-your-capital-structure

Roth, R. (2008). The writers guide to annual reports. Atlanta, GA: Booksurge.com.

Scherreik, S. (2002, December 22). How efficient is that company? Retrieved December 5, 2013, from businessweek.com: http://www.businessweek.com/stories/2002-12-22/how-efficient-is-that-company

EMI Music: A Financial Analysis (Part 1)

Published January 13, 2014 by Mayrbear's Lair

 Emi_music_logo_2012

To conclude my research work in organizational management with respect to the analysis of a company’s financial reports, this week we will wrap things up with a three part examination of the various components contained within the 2010 Annual Report of my former place of employment, the privately owned corporation known as EMI Music (EMI) to help us determine their financial condition and forecast their outlook. To help present a clearer picture of the company’s activities and overall functionality, the study will draw information from the report’s financial statements to evaluate such elements as assets, liabilities, and stockholders’ equity to help determine EMI’s viability as a business. The research will also include a closer look at the following components: (a) the economy, industry, and background of the firm; (b) their short term liquidity; (c) how efficiently they operated; (d) an examination of their capital structures; and (e) an assessment of their profitability levels, to reveal EMI’s financial condition as well as forecast their future potential. My research will also focus on the information retrieved from their financial data, ratios, and trends that were contained within the notes and statements to evaluate the firm’s use of their operating, financing, and equity activities to determine whether the corporation was managed efficiently and was profitable. The findings of this research will conclude that EMI’s financial statements provided sufficient evidence to reveal an authentic representation of their financial health during that time.

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Introduction

A corporation’s annual report helps provide shareholders a glimpse into a company’s overall performance and financial effectiveness. They are developed to satisfy the many needs of a variety of different people, including shareholders, creditors, economists, and strategists. Roth (2008) explains they have become the platforms that are used to launch new products, promotional strategies, and even shape the company’s cultural attitudes (Roth, 2008). They typically include an opening statement from the chief executive officer (CEO), the company’s financial statements, market segment information, new product strategies, subsidiary activities, as well as research and development (R&D) plans, all of which serve to bring a transparent view of the company’s operating, financing, and investing activities.  To fully understand and appreciate the information provided in EMI’s Annual report the examination will commence with a brief look at the company’s background.

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Background, Industry, and Economy

The true nature of a company’s image can be ascertained through a comprehensive analysis provided by the data contained within their annual reports. Fraser and Ormiston (2010) purport that in order to comprehend how to navigate through the vast amount of data in the reports, familiarity with accounting is helpful (Fraser & Ormiston, 2010). Learning more about the company’s background in the meantime, also helps provide valuable information that can help analysts forecast the firm’s future based on past performances.

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For instance, EMI is considered a prestigious primary-market record label. It is recognized worldwide and conducts business in 32 countries with a network of licenses to operate elsewhere as well. It is part of the EMI Music Group, which is a subsidiary of the Universal Music Group. EMI owns some of the most famous record labels in the world, including Capitol, Parlophone, Virgin, Blue Note, Capitol Records Nashville, EMI Christian Music Group and EMI and Virgin Classics.The firm is organized into two core divisions: EMI Music, which specializes in the signing, developing, and marketing of recording artists and their intellectual property; and EMI Music Publishing, which specializes in the signing, developing and marketing songwriters.

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The company was founded in 1942 by American lyricist, songwriter, and recording artist Johnny Mercer, who wrote the famous lyrics to Henry Mancini’s Moon River that later, went on to become the trademark song for singer Andy Williams (The Johnny Mercer Research Guide, 2012). Throughout the years, EMI consisted of an impressive artist roster including such mega stars like David Bowie, Tina Turner, Bob Seger, Coldplay, Lady Antebellum and Katy Perry. They have a wealth of artists in their catalog including such legendary icons like the Beach Boys, Iron Maiden, Depeche Mode, Miles Davis, Frank Sinatra, Duran Duran and the Pet Shop Boys. In the global marketplace, EMI distributes a wide genre of music including, pop, rock, classical, jazz, R&B, and hip-hop through various sister labels. With offices worldwide, the Capitol Records Tower in Los Angeles (where I worked) is their most famous building in America and stands out as a Hollywood landmark that is recognized throughout the world.

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Conditions in the music industry are highly competitive and unpredictable. EMI’s Annual Report, however, revealed that they continued to display the assets, strategic power, positioning, and a staff of top performers worldwide that had the ability to take the firm to the forefront of the industry. For example, one of the company’s strengths lies in their catalog inventory. The release of the complete remastered Beatles catalog during that time, demonstrated EMI’s ability to capitalize from their catalog assets. The remastered Beatles albums sold over 10 million units in one year enabling the firm to experience unprecedented levels of success during that time. In addition, EMI artist Lady Antebellum released an album that was one of their top sellers in 2010.

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The publishing division also proved they were in a leading position in the music industry during that accounting period. For instance, they were named US Publisher of the Year for the 12th consecutive time by the leading trade publication, Billboard Magazine. Furthermore, they had been named Publisher of the Year at the ASCAP Pop Music Awards in the US for eight consecutive years. In the meantime, in the UK, where the report was filed, EMI was named Music Week’s Publisher of the Year for the 14th consecutive year.  These statistics provide sufficient evidence that support the company’s strength of earning abilities in music industry.

Wednesday’s post will reveal Part 2 of this analysis where we analyze EMI’s short term liquidity and take a closer look at their operating efficiency. See you then!

References

(2011). EMI annual review 2009/2010. Finances. Hollywood: Maltby Capital Ltd.

The Johnny Mercer Research Guide. (2012). Retrieved October 30, 2013, from The Johnny Mercer Foundation: http://www.johnnymercerfoundation.org/initiatives-charities/for-researchers/johnny-mercer-research-guide/

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Friedlob, G., & Welton, R. (2008). Keys to reading annual report. Hauppauge, NY: Barron’s Educational Series.

Loth, R. (2013). Profitability indicator ratios: Profit margin analysis. Retrieved December 5, 2013, from investopedia.com: http://www.investopedia.com/university/ratios/profitability-indicator/ratio1.asp

How to determine your capital structure. (n.d.). Retrieved December 5, 2013, from Structuringfinance.com: http://www.structuringfinance.com/capital-structure/how-to-determine-your-capital-structure

Roth, R. (2008). The writers guide to annual reports. Atlanta, GA: Booksurge.com.

Scherreik, S. (2002, December 22). How efficient is that company? Retrieved December 5, 2013, from businessweek.com: http://www.businessweek.com/stories/2002-12-22/how-efficient-is-that-company

An Analysis of Kodak’s Quality Financial Reporting

Published January 10, 2014 by Mayrbear's Lair

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Quality financial reporting (QFR) helps paint a clear picture of a company’s financial condition. Miller (2002) explains that QFR is more of an attitude than a set of practices that involves firms developing relationships with capital market participants to help communicate their needs effectively (Miller, 2002). The focus of this post is to ascertain whether the financial statements of the Kodak Corporation’s 2007 Annual Report revealed a high level of quality financial reporting. To determine this, the statements should reveal: (a) their cash flow potential, (b) how effective they were at raising capital, and (c) whether it painted the real economic picture of the firm or if the data was fabricated to make it appear in better financial health than it was. My research will also determine whether the report provided sufficient explanations about their accounting choices, estimates and judgments, and whether they were relevant, verifiable, consistent, and presented the data fairly with neutrality, all of which are critical criteria for high quality financial reporting. The following components were used as a checklist to help determine the quality of data: (a) the earnings reported for sales, (b) the cost of goods sold, (c) the non-operating revenue and expenses, (d) the operating expenses, and (e) other commitments and contingencies. The findings of this post will deduce that Kodak’s 2007 Annual Report revealed a high level of quality reporting that was effective in representing the economic truth of their financial condition.

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Evidence of Kodak’s QFR

Quality financial reporting helps capital market participants understand a company’s financial condition from the data and ratios that the statements contain which reveal cash flow and profitability outcomes. Bahnson and Miller (2002) explained it more effectively stating that QFR can divulge how companies create opportunities to receive and perpetuate cash flows (Bahnson & Miller, 2002). My research work began with an examination of Kodak’s sales and costs of goods sold figures to search for inconsistencies and trends. Next, I took a look at the inventory valuation methods and determined it was based on fair market value. In addition, there were no clues that would indicate premature revenue recognition. In the meantime, Kodak’s income statement (see Exhibit A) showed a steady decline in net sales figures from 2005 to 2007. A comparison of the accounts receivables and inventories ratios from the Common Size Balance sheet (see Exhibit B) corroborated the decline and confirmed a large ratio of debt to revenue. The common size income statement (see Exhibit C), also revealed a consistency in debt ratios that showed declining patterns in the relationships among sales, accounts receivable, and inventory. The notes offered adequate explanations for their accounting choices and disclosed the declining figures resulted from their restructuring strategy. In other words, to investors, debt implies risk, but Kodak’s report offered relevant details that were verifiable to explain the reasons for these debt ratios. Furthermore, the declining numbers did not raise red flags indicating the possibility of premature revenue recognition. This level of clarification provided a fuller picture that helped explain the low profit and high debt figures to alleviate uncertainty.

Kodak’s report also provided details about their revenue recognition policies explaining how their revenue was derived as well as how they calculated deferred income. In addition, the report included details about reductions to revenue policies and the methods used to measure revenue derived from consumer incentive programs. The statement also provided explanations with neutrality about estimates and judgments that were made based on the firm’s past experiences and historical records. This helped leave little room for unanswered questions about how Kodak’s inventory was valued as well as how it was collected and recognized.

Quality financial reporting can also help skilled analysts identify whether a company is manipulating the figures to show higher profits. For instance, Kodak’s common size income statement (Exhibit C) revealed that the gross profit margin showed a slight increase each year but reported zero operating profits. This means the firm was able to increase sales but not enough to control the substantial growth of operating expenses which was most likely due to their restructuring process. The data also confirmed their ability to raise funds showing a $238 million impairment charge from the sale of their Chinese facility and that selling the Health Group Company was also expected to generate future cost savings.

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What the Report Revealed about Kodak’s Future

High quality financial statements disclose the real economics of the company’s transactions and also reveal how well the company managed their assets to forecast their future. Turner (2000) asserts without QFR analysts lack reliable data to forecast future earnings (Turner, 2000). For example, Kodak’s ratios revealed that cash flow margins continued to decrease which made it difficult for them to service debt, pay dividends, and invest in further capital assets. However, the notes revealed their confidence of strength in future earnings and cash flow potential because of their ownership patents. This data revealed their potential to generate continuous revenue from licensing.

Other clues about Kodak’s future can be determined from explanations that revealed the firm’s other long-term commitments which include rental expenses of real property that showed a decreasing trend beginning with $149 million in 2005, dipping to $130 in 2007 that continued to drop in 2008 to $99 and thereafter. Furthermore, the report disclosed other contingencies stating the company and its subsidiaries were involved in a variety of litigation cases that could have an adverse effect on their future finances. Finally, the consumer price index (CPI) is also considered to help analysts forecast Kodak’s future earnings. For example, statement ratios along with CPI figures that measure the rate of inflation are significant components that are factored in to help strategists forecast future potential earnings. For instance, a 6% rate of inflation occurred during the 2006-2007 accounting period which was measured at 201.6 in 2006 and jumped to 207.3 in 2007. Strategists use these figures to help predict Kodak’s future growth potential based on past performances and factoring in a 6% CPI increase level into their formulas, which was calculated at 215.3 in 2008.

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Conclusion

Incomplete information on a company’s financial statements can create uncertainty for capital market participants. Fraser and Ormiston (2010) remind us that high quality financial statements provide sufficient data that help business owners make more effective decisions (Fraser & Ormiston, 2010). My research work determined that Kodak’s financial statements provided sufficient explanations that: (a) disclosed their cash flow potential from relevant accounting data of past performance to help forecast future behavior; (b) used reliable information that reflected the real economics of activities reported; (c) included verifiable and measurable data developed free of bias towards a predicted result; and (d) provided valuable ratio data for comparison to reveal how effective they were at raising capital. Based on these principles, the findings of this study concluded that Kodak’s 2007 Annual Report met criteria that were consistent with quality reporting that revealed the true nature of their financial condition during that period.

Exhibit A

kodak income statement Exhibit A

(Kodak, 2008)

Exhibit B

Assignment 5 Exhibit B - Common Bal

(Kodak, 2008)

Exhibit C

Assignment 5 Exhibit C - Common Income

(Kodak, 2008)

References

(2008). Kodak. Washington: Securities and Exchange Commission.

Bahnson, P., & Miller, P. (2002). Quality financial reporting. New York, NY: McGraw-Hill.

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Miller, P. (2002, April). Quality Financial Reporting. Retrieved November 25, 2013, from Journal of Accountancy: http://www.journalofaccountancy.com/Issues/2002/Apr/QualityFinancialReporting.htm

Turner, L. (2000, March 23). Speech by SEC staff: Charting a course for high quality financial reporting. Retrieved November 27, 2013, from US Securities and Exchange Commisssion: http://www.sec.gov/news/speech/spch356.htm

Preparing An Annual Report

Published January 8, 2014 by Mayrbear's Lair

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When a corporation’s staff of accountants finish preparing the financial statements for the fiscal year the next order of business is to call a meeting with the company’s CEO, as well as the Director of Investor Relations and representatives from the marketing and art departments to design that current year’s annual report.  Based on the research I conducted in my financial analysis course, this post will provide information on how I would present the main ideas I believe a company should present to shareholders in the annual report.

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To begin with, it is important that the company’s annual report provide investors and division heads with knowledge about the company’s weaknesses while offering shareholders security about the company’s strengths and future growth forecasts. These are important components that will help paint a full transparent picture of the firm. In preparation of the company’s Annual Report the following information consists of the main ideas that should be included in the documentation, in addition to the traditional financial statements that provide an overview of the firm’s financial condition.

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First and foremost, the Chairman’s statement should include their pride in the company’s achievements. For example, a company that holds the title as the third largest retailer of recreational products in the US should state that clearly as well as their many other strengths, such as a favorable economic and industrial outlook. In addition, the report should also include others strengths, for instance their geographical position may produce more favorable results.  A company that sells ski equipment, for example, located in Colorado is in a better position geographically than one located in the Florida region. These kinds of factors can be included to illustrate how the geographic location helps reduce competition and is a beneficial component for economic and industral growth.

policy-body

The financial report should also reveal the company’s policies and a view of the operational, financing, and equity activities. In addition, it should include details about the firm’s marketing tactics and objectives, expansion strategies, and illustrate their efficiency in the management of their accounts receivables and inventory divisions or any other components that have been proven quite effective. Another important component that should be considered is the company’s control of the operating costs, and how successful their use of financial leverage and solid coverage of debt service requirements were. Furthermore, the report should reflect the firm’s continual growth or plans for implementing substantial sales growth with profitability levels as well as results and new strategies that focus on the company’s expansion process. These are significant components that can help confirm a firm’s strengths and weaknesses that supports how well a company performed during that fiscal year.

Quantifying-Small-Business-Risks

The report’s commitments and contingencies section should also disclose the risks, noting the significant one(s) the company faces, for example like an economic vulnerability from unfavorable weather conditions which may increase a firm’s debt financing. In conclusion, on the whole, the report will reflect that the outlook for company stating how well or poorly they did with strategies and plans for the future that will put the firm in a better position that will ensure investors and staff alike, that the firm is a secure company to invest in and includes corporate governance policies to support the artistic and marketing divisions guided by the effective leadership skills of the company’s CEO.

References:

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.