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Eastman Kodak Balance Sheet Analysis

Published December 2, 2013 by Mayrbear's Lair

Accounting.

A corporation’s balance sheet provides significant data about a company’s assets and liabilities and divulges the true nature of their financial condition. Makoujy (2010) contends that balance sheets are the financial statements which provide an overview of a company’s assets, liabilities, and stockholders’ equity. These documents disclose how much capital is brought into an organization and how it is allocated to satisfy the firm’s liabilities and owner’s equity commitments (Makoujy, 2010). This information is important for helping investors deduce a company’s risk levels by analyzing the profit and loss measurements they provide. It also gives creditors an indication of a firm’s financial condition from the short-term liquidity ratios they disclose. The focus of this research continues with the analysis work centered on the Kodak Company’s financial condition provided from their 2007 Annual Report. This study will take a closer look at the report’s balance sheets to reveal how strategists determine the firm’s net financial position by the information provided in the statements that summarize Kodak’s assets, liabilities, and owner’s equity. The research will disclose how the data from the balance sheets help investors and creditors in their financial decision making by examining the figures that revealed the truth about Kodak’s operating condition and overall net worth during that given point in time. The findings of this research, from evaluating the information provided in the Kodak Company’s balance sheet statements, will determine that the company’s overall financial condition and their stability as a business during that time was below par.

The Balance Sheet’s Function

The true nature of a company’s balance sheet that is provided their annual reports, serves to summarize the company’s assets, liabilities, and shareholder equity during a specified period of time. To understand these concepts more clearly, it is important to comprehend that all the possessions of a company (assets) are either owned free and clear (equity) or were purchased by acquiring debt (liability). To measure a company’s performance levels, Skonieczny (2012) asserts that their balance sheets must follow one important equation in that the total amount of assets must equal the total amounts of both the company’s liabilities and equity or net worth. In other words, the accounting figures of a balance sheet must mathematically balance out by adhering to the following equation:

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For example, when the Kodak Company makes a down payment for property, equipment, or any other expenditure meant to help with the operation of the firm, that payment would be classified as an example of equity. In the meantime, the mortgage payments on their facilities are considered a form of debt (Skonieczny, 2012). Balance sheets can be intimidating and difficult to comprehend for those who are not proficient in mathematics or are untrained and lack bookkeeping skills. To help those that are unfamiliar traverse safely through these accounting waters, one efficient instrument that is used for scrutinizing a balance sheet is the common-size balance sheet. Common-size balance sheets provide the same information only rather than disclosing the actual figures, the values are provided as percentages with a common denominator. This strategy enables investors and creditors to compare account sizes as percentage rates over a period of time. This kind of balance sheet is also ideal for helping investors identify and observe trends.

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Kodak Company’s Annual Report Findings

Even though they may be difficult to comprehend, balances sheets provide vital information that creditors use to measure a company’s short-term liquidity. Fraser and Ormiston (2010) postulate that the information provided on the balance sheet with respect to a company’s inventory is an important element in the examination of a company’s liquidity. This component is significant, for instance, because creditors can determine the ability of an organization to meet currency needs as they arise (Fraser & Ormiston, 2010). In addition these figures can offer insight as to how well a company is performing during a certain period in time. For instance, Kodak’s balance sheet (Exhibit A) indicates that in 2006 their current assets (including cash equivalents, short term investments, accounts receivable and inventories) totaled about $5.5 million, while in 2007 that figure rose to $6. However, the total assets reported in 2006 were much higher ($14.3 million) than they were in 2007 where it dropped down about a million dollars ($13.6 million). This indicates that the long-term assets values increased during that time period which may have resulted from the accumulated depreciation values.

Shareholders are interested in a company’s balance sheet because it provides valuable information that can help them determine a company’s risk levels. For example, Kodak’s balance sheet (Exhibit A) indicates that in 2007, their assets totaled about $14 million while their liabilities reflected a total amount of about $11 million. To help investors ascertain the ratio measurements they may look to a common-size balance sheet to give them a simpler overview of their financial condition. Using this strategy analysts would conclude that during that given period, the Kodak Company committed a substantive percentage (around 78%) of their total assets on meeting their debt obligations leaving only 22% that was allocated towards shareholder equity. Those figures are a slight improvement however, from 2006, whose figures during that year disclosed that the company committed 90% of their total assets to meet their debt requirements. To investors and creditors these figures represent a high level of risk and a clear indication that although they were making progress, the Kodak Company was still not in a healthy financial condition during this period in time.

Conclusion

Balance sheets measure a firm’s profitability and provide shareholders important information on current and future risk levels. It is for this reason that stockholders and owners require a system to help them measure a company’s performance levels in a periodic manner. The balance sheets help provide investors and creditors with information that allows them to determine whether a company is operating in a profitable manner which also helps them predict whether stock prices will rise or fall. A closer examination of the Kodak Company’s balance sheets indicates the risks they took were considerable. However, it also revealed that their strategies and cutbacks were slowly proving effective which allowed them to keep the company operational. In conclusion, the findings of this study’s assessment with respect to the Kodak Company’s balance sheet provided from their 2007 Annual Report, deduced that although the Kodak Company was making a valiant effort to maintain operations, they were still struggling in their efforts to achieve profitable goals during that given time.

Exhibit A

Kodak Balance Sheet Exhibit A Assignment 2

(Kodak, 2008)

References

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

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

Makoujy, R. (2010). How to read a balance sheet: The bottom line. New York, NY: McGraw-Hill.

Skonieczny, M. (2012). The basics of understanding financial statements. Schaumburg, IL: Investment Publishing.

Understanding the Balance Sheet

Published November 25, 2013 by Mayrbear's Lair

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Making investments in a company’s stock is a significant event in an individual’s life because an uninformed decision can become quite costly. To make the most informed decisions, individuals should conduct extensive research to help them make choices they feel secure about. To achieve this, many people can look to a company’s annual report for more insight into their financial condition. Roth (2008) explains that a company’s financial statements contained within their annual report are a significant asset to help individuals who are looking to make a sound investment in a company’s stock. They help people make better assessments by learning about a company’s strategies, financial health, and even information about their behavioral and moral values (Roth, 2008).  For this blog post, we will address our fictitious friend Liz who is confused about the true state of the Target Corporation’s financial condition (See Exhibit A below). This is a brand she is considering investing in because of her emotional attachment to it. However, the figures her buddy Tom disclosed upon reviewing their balance sheet suggested that investing in Target was not a sound idea because of the substantial percentage amount (74%) they invested of their total assets as risky obligations. Tom’s percentage rate caused Liz confusion because her calculations arrived at a different figure which was lower and amounted to 65%.

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To help Liz with her confusion, we must explain how Tom arrived at his position. First, let’s analyze how Liz calculated her figures. For example, at the end of their fiscal year in February, 2008, the Target Corporation had liabilities (including current and long-term) that rounded off to about $29 million, while their asset totals came to about $45 million. To help Liz better understand these debt structure figures, she looked to a common-size balance sheet formula to translate these numbers into percentages. By taking the $29 million liabilities figure and dividing it by the $45 million asset figures, Liz came up with 65% as amount of debt Target has accrued. Tom, however, arrived at a figure that was nearly 10% higher which confused Liz because her math equations incontrovertibly added up.

Calculating-Percentages

What Liz did not take into consideration in her calculations, however, were the company’s commitments and contingencies contained within the notes of the report.  Fraser and Ormiston (2010) suggest that even though the balance sheet may not reflect a dollar amount in this category, this disclosure is intended to draw attention to the information that is located in the notes of the financial statements. These notes are significant because they list the commitments of a company’s contractual obligations that may still have an adverse effect on their financial outlook. Because companies engage in complicated financial reporting procedures that include such things as product financing, sales of receivables with recourse, limited partnerships and joint-ventures, that are not required to be included on the balance sheets, they are however, provided in the notes (Fraser & Ormiston, 2010). These are complicated components that are difficult to comprehend but play an important role in painting a full picture of the company’s operations. In other words, there are other factors that are not reported on a company’s balance sheet with unpredictable outcomes that can have an effect on Target’s future liabilities. In other words, Liz also needed to include in her calculations the figures provided in the commitments and contingency notes as well. These notes revealed for instance, that Target also had further contractual obligations and operating leases that extended beyond the year 2008 which included lease payments of $1,721 million with options that could extend the terms of the lease. Their contractual obligation payments also consisted of interest rates and a $98 million commitment in legally binding lease payments for the planned openings of future facilities that were scheduled to occur in 2008 or later. Tom arrived at his additional 10% figure because he factored in the information of these provisions to his equations and Liz did not.

Exhibit A

Target Example

References:

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

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

The Balance Sheet

Published November 22, 2013 by Mayrbear's Lair

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What is a Balance Sheet?

Balance sheets are financial statements contained within a company’s annual report. The information provided on a balance sheet reveals what a company owns, how much it owes and what remains in the form of equity for its shareholders. Skonieczny (2012) explains that a company’s balance sheet discloses their financial position on a particular day like the end of the year or the first quarter and are based on the following important equation:

assets = liabilities + equity

The reason it is called a balance sheet is due to the fact that the accounting equation has to balance out at all times (Skonieczny, 2012). This means that the assets must always be an equal amount that reflects the companies liabilities and equity. In other words, all possessions (assets) are either owned free and clear (equity) and were purchased by acquiring debt (liabilities). For example, a down payment on a company building is an example of equity, while the monthly payments are an example of debt. The information provided on a balance sheet is comprised of the company’s: (a) assets, including current assets, long and short term investments, property, plant and equipment, plus any other tangible and intangible assets; (b) liabilities such as accounts payable, salaries, interest and taxes paid, bank notes, loans, mortgage obligations and other debts; and (c) stockholder’s equity including capital stock and retained earnings.

BALANCE-SHEET

What is a common sized balance sheet?

Makoujy (2010) asserts that an expense occurs when value is lost and that balance sheets help strategists understand not only what a company possesses during a certain period of time, but how much it has grown or lost during that time (Makoujy, 2010). In the meantime, common-size balance sheets are helpful instruments that allow companies to assess their financial situation. Fraser and Ormiston (2010) explain that a common-size balance sheet specifically serves as a tool designed for vertical ratio analysis as a means of measuring and comparing various components that have a common denominator (Fraser & Ormiston, 2010). In other words, it is a kind of balance sheet that shows each dollar amount as a percentage of a common number. This allows analysts to compare account sizes over time as the balance sheet grows and the figures change. They are also effective for identifying and observing trends.

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How to create a common sized balance sheet?

To create a common-sized balance sheet, analysts must convert each asset, liability, and shareholders’ account to a percentage amount so that the balance sheet reflects that the total assets are equal to the total liabilities and shareholders’ equity figures. To create a common-sized balance sheet the amount of total assets must be determined first, like $100,000 for instance. Next the amount of each asset is divided by the amount of total assets. Then each result amount is multiplied by 100 to establish the common-size percentage for each asset. If the company’s cash account, for example, is $30,000, you would divide $30,000 by $100,000 to obtain a figure of 0.3. You would then multiply that 0.3 figure by 100 to arrive at 30% as the common-size percentage for the cash account. In other words, the company’s cash account makes up 30% of the total assets. The same formula is applied to determine the percentage amounts of the company’s liabilities and shareholders’ equity which amount should total the $100,000 figure to balance out the total assets.

Monday’s post will focus on understanding how investors use the information on a balance sheet to determine whether a company would make a good investment. Until then … have a great weekend everyone!

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References:

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

Makoujy, R. (2010). How to read a balance sheet: The bottom line. New York, NY: McGraw-Hill.

Skonieczny, M. (2012). The basics of understanding financial statements. Schaumburg, IL: Investment Publishing.