astoll3.weebly.com · Web view2018. 10. 17. · 1.Our 2011 results reflect the impact of a non-recurring, pre-tax lease termination. 2.Operating revenue increased over the past

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INTRODUCTION TO THE CORPORATE ANNUAL REPORT:

A Business Application with IFRS Content

3rd edition

Copyright 2011 by Applied Accounting Analytics. All rights reserved. Reproduction or translation of this book beyond that permitted by the applicable copyright law without Applied Accounting Analytics’ permission is prohibited. Requests for permission to reprint or for further information should be directed to [email protected] or [email protected].

ISBN: 978-0-9841839-2-0

mailto:[email protected]

mailto:[email protected]

To be completed by the student and submitted with the completed annual report project according to your instructor’s requirements.

Complete the following form before you submit your assignment. This step is required to

validate your compliance with sections 107 or 108 of the 1976 United States Copyright

Act.

1. Remove the front cover of the workbook and identify:

Student Name: Alex Stoll

Term: Fall 2012

Selected Company: Hawaiian Airlines

Instructor: Kevin Lee

2. Print your completed electronic template.

3. Attach the following:

This page completed with all required information. Completed Word form template. Form template boxes expand as you input

responses.

CHAPTER 1 - INTRODUCTIONSelect a Company and Gather DocumentsChapter 1: Select a Company and Gather Documents – Question 1

Identify with an “X” the primary source of data for this project.

X Annual report to shareholders

XAnnual report to shareholders with a letter from Chief Executive Officer and SEC Form 10-K as part of the annual report to shareholders. The annual report may include additional general company information.

X SEC Form 10-K and the company website.

Fill in the page numbers from the annual report where the following are located.

Required information for this workbook project.

Page No.

Required information for this workbook project.

Page No.

Financial Highlights Not absolutely necessary, but very

common in annual report to shareholders.

Not in SEC Form 10-K. May be posted on company website. If so put WEB in Page No. box.

If not available, put N/A in Page No. box.

Pg. 26

Chief Executive Officer Letter May be labeled President’s, CEO’s or

other top official’s message or letter to the shareholders

Not in SEC Form 10-K. Likely posted on company website if SEC Form 10-K used to satisfy the annual report to shareholders reporting requirement. If so put WEB in Page No. box.

No page number given – occurs

between the third and sixth pages of

the document

Management’s Discussion and Analysis (MD&A)

Pg. 25-26

Notes to Financial Statements Put range of pages, for example, 47 to 58.

Pg. 46-72

Income StatementMay be labeled Statement of Earnings Pg. 42

Report of Independent Accountants or Independent Auditors’ Report

Pg. 74

Balance Sheet May be labeled Statement of Financial Position Pg. 43

Five- or Ten-Year Summary of Operating Results Item 6 in SEC Form 10-K

Pg. 24-25

Statement of Change in Stockholder’s Equity

Pg. 44 Management’s Report (Responsibility) on Internal Control over Financial Reporting

Pg. 73

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Item 9A. Control and Procedures in SEC 10-K

Statement of Cash Flows

Pg. 45

Investor and Company Information or Shareholder Information

Pg. 75 – refers to ‘proxy

statement relating

to Annual Meeting

of Stockholders 2012

Identify Why You Selected This CompanyChapter 1: Identify Why You Selected This Company – Question 1

A) What is/are your motivation(s) or interest(s) in selecting this company? [See above for examples.]

B) What question(s) are you seeking to answer? [For example, is the company profitable? Can the company change and develop new products and services to be competitive? Would I invest in this company? Will the company provide rewarding career opportunities? In chapter 5 you will have pulled together the financial and nonfinancial information to answer these question(s).]

A) I am selecting this company because I love to travel and I recently flew this airline to go to Hawaii this summer.

B) Is the company profitable? What new pieces of inventory are they adding to improve their business?

Company and Annual Report EssentialsChapter 1: Company and Annual Report Essentials – Question 1

What is the company’s complete name?

Hawaiian Airlines

Chapter 1: Company and Annual Report Essentials – Question 2

What is the address of your company’s corporate headquarters?

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3375 Koapaka Street, G-350

Honolulu, HI 96819


Identify the company’s website address.

http://www.hawaiianairlines.com/


Identify the telephone number and e-mail address of the company’s Investor Relations Department.

Telephone number: 908-719-3206

E-mail address: [email protected]


Which stock exchange lists your company?

NASDAQ


What is your company’s stock exchange trading symbol?

HA


What is your company’s Standard Industrial Classification (SIC) and sector? Run a search on “Standard Industrial Classification,” and the classification and code will be identified. Your company may list more than one SIC code number. The first listed is considered the primary SIC for the company.

For example, search – The Home Depot SIC – brings up a listing of sources. InvestorWords is one website location option - http://www.investorwords.com/cgi-bin/stocksymbol.cgi?ticker=HD. Move down the page and you will find:

SIC Code: 5211Sector: Basic Materials, Construction, Retail

Industry: Lumber and other building materials

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http://www.investorwords.com/cgi-bin/stocksymbol.cgi?ticker=HD

http://www.investorwords.com/cgi-bin/stocksymbol.cgi?ticker=HD

SIC Code: 4512 Sector: Transportation


Locate the board of directors listing. How many board members does your company have?

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How many of the directors are company employees, labeled inside directors? And how many are non-company directors, labeled outside directors? Why does a company want and need outside directors?(Inside and outside directors are typically identified as such by their title and company.)

Inside Directors: 2Outside Directors: 8*One not given any information.Need people outside of their company who have a lot of experience in the industry who can offer an un-biased opinion of the companies situation and ideas on how to improve.


Leadership addresses the stockholders, typically, once a year at the annual stockholders meeting. Identify where and when this occurred, as reported in your annual report.

Where: Kahili Suite of the Hilton Hawaiian Village Beach Resort and SpaWhen: Thursday, May 24, 2012

Company Strategy and Business Environment Chapter 1: Company Strategy and Business Environment – Question 1

Review the chairman’s message of your company’s annual report. Does it appear to be uplifting or somewhat apologetic? Identify phrases that support your position.

The report is uplifting: showed their resiliency to overcome heafty increases in gasoline prices “35% higher” by still managing to “lift second half earnings to where they were in 2010”. They also expressed growth in their investments in new types of planes and adding routes from different locations, most notably NYC, Osaka, and Seoul.

Chapter 1: Company Strategy and Business Environment – Question 2

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Check below the one primary company strategy identified in the chairman’s message. Support your answer with phrases found in the chairman’s message that pointed you to the identified corporate strategy.

Growth: VerticalClick here to enter text.

Horizontal - Hawaiian Airlines incorporated this strategy as described in the chairman’s message to the stockholders.

Concentric Click here to enter text.

Conglomerate Click here to enter text.

Stability Click here to enter text.

Retrenchment Click here to enter text.

Phrases to support your above conclusion:

“The three additional B717s were put into service in the first quarter of 2012 and were central to the creation of our new Maui hub.”“This initiative is serving to ease transit between neighbor islands and offer visitors more choices with expanded nonstop flights from the mainland.”“launch of new services to Seoul in January and Osaka in July.”


Briefly summarize the company’s discussion found in Item 1 of SEC Form 10-K.

Type of business:

Hawaiian is engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands, between the Hawaiian Islands and certain cities in the United States, and between the Hawaiian Islands and the South Pacific, Australia, and Asia. It is the twelfth largest domestic airline in the United States.

Major business segments:

Aircraft & Ground Facilities

Primary customers:

Our business is not dependent upon any single customer; or a few customers; the loss of any one would not have a material adverse effect on our business.

Primary products and/or services:

Services – flight transportation to the Hawaiian Islands from North America (United States), the South Pacific, Austrialia, and Asia.

Other:

Click here to enter text.

5


Identify broad-based social, political, economic, and technological concerns that may affect your company. Put N/A if one of the categories does not apply.

Social:

They operate in an extremely competitive market. The domestic airline industry is characterized by low profit margins, high fixed costs and significant price competition. Many of their competitors are larger, have greater financial resources, and have better name recognition than they do.Political:

The State of Hawaii now seeks to impose new laws and regulations on the airline industry that could have an adverse effect on our financial condition and results of operations.

Economic:

The success of their business is dependent on ‘world-wide economic conditions’. Demand for discretionary purchases in general, and air travel and vacatins to Hawaii in particular, remains unpredictable. Negative changes in exchange rates between the US Dollar and other foreign currencies can have an impact on the growth of their business. Finally, the economic banks recession in the past few years has increasingly lead to diminishing the ability to finance.

Technological:

They depend heavily on computer systems and technology to operate their business. Any substantial or repeated failures of their computer, website or communications systems could negatively affect their customer service, compromise the security of customer information, result in the loss of important data, loss of revenue, and increased cost.

Other:

N/A

Wrap-upChapter 1: Wrap-up – Question 1

After further review of additional information you should now be confident in identifying the one primary company strategy, beyond the insight provided by the chairman’s message?

Check below the one primary company strategy identified in the chairman’s message and all other supporting documents. Support your answer with phrases.

6

Growth: VerticalClick here to enter text.

Horizontal Hawaiian Airlines is using Horizontal integration to reach out to customers by providing flights from many markets on multiple continents, as well as providing an incentives plan (i.e. Frequent Flyer Program) to keep these people visiting.

Concentric Click here to enter text.

Conglomerate Click here to enter text.

Stability Click here to enter text.

Retrenchment Click here to enter text.Phrases to support your conclusion from information gathered from the chairman’s message, Item 1 of the SEC Form 10-K and other insight gained from completing Chapter 1.

The HawaiianMiles frequent flyer program was initiated in 1983 to encourage and develop customer loyalty.HawaiianMiles allows passengers to earn mileage credits by flying with us and our partner carriers.Daily service on our North America routes between Hawaii and Los Angeles, Oakland, Sacramento, San Diego,San Francisco and San Jose, California; Las Vegas, Nevada; Phoenix, Arizona; Portland, Oregon and Seattle,Washington;Scheduled service on our International routes between Hawaii and Pago Pago, American Samoa; Papeete, Tahiti;Sydney, Australia; Manila, Philippines; Tokyo and Osaka, Japan and Seoul, South Korea.

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CHAPTER 2 - ANNUAL REPORT STRUCTUREFinancial HighlightsChapter 2: Financial Highlights – Question 1

Review the financial highlights of your company’s annual report to the shareholders. Identify net sales or revenues, net income, basic earnings per share (BEPS), and total assets for the current and preceding years. These are the most common values included in financial highlights. If your company reports something different, simply cross out an item here and recap what is reported. SEC Form 10-K does not provide financial highlights. You may find this information on the company website. If not available put N/A in the first row of boxes.

Categories Current Year One Year Prior Two Years Prior

Net sales or revenues 1.65 billion 1.31 billion 1.18 billion

Net income N/A 110.3 million N/A

Basic EPS N/A N/A N/A

Total Assets N/A N/A N/A

Based on your preliminary review, is your company performing better than, equal to, or less favorably than in the prior year? Briefly explain.

They are improving as seen due to their increased levels of revenue over the last three years. This is primarily due to their investment into more advanced and efficient inventory and their increase in flight options from cities around the world.

General Company and Marketing InformationChapter 2: General Company and Marketing Information – Question 1

Look for pictures of product and people that are colorful and send a positive company signal to the reader.

Category

Example: Volunteer Activities

Message

Ongoing and contributing to the success of the community

Picture of different destinations they fly to

Shows that they are growing and reaching out their services to a larger audience.

Vacations Packages Offering vacation packages to make flying with their company more desierable.

Promotions Offering deals on their inter-island flights to entice others

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to fly with their airline when visiting Hawaii.

Click here to enter text. Click here to enter text.

Click here to enter text. Click here to enter text.

What is the broader message from this information?


Management’s Discussion and AnalysisChapter 2: Management’s Discussion and Analysis – Question 1

Results of Operations:

Identify the primary drivers/issues that explain current and future results of operations discussed in the MD&A. For example, the gross profit percentage increased because of improved buyer/supplier relations resulting in greater overall operating performance. Or an increase in operating expenses because of increased fuel costs reduced profits. List the six major drivers/issues of performance you find in the MD&A section of the annual report.

1.Our 2011 results reflect the impact of a non-recurring, pre-tax lease termination2.Operating revenue increased over the past three years due to increases in passenger revenue.

3.Operating expenses have increased in the past three years due to the purchase of new inventory (planes) including: the new Airbus A330-200.

4.Maintenance Materials and Repairs have increased due to the purchasing of the new Airbus and the maintainence on their other Boeing planes due to 10-year airframe checks mandated by the federal government.

5.The increase in nonoperating expense in 2011 compared to 2010 is primarily related to an increase in interest expense and amortization of debt discounts and issuance costs due to the additional financings we entered into in 2011 and losses recognized on our fuel derivatives.6.Our liquidity is dependent on the cash we generate from operating activities and our financing arrangements. Cash and cash equivalents increased significantly in 2011. Our restricted cash balance , which consisted almost entirely of cash held as collateral by entities that process our credit card transactions for advance ticket sales.

Liquidity:

Recap what you find about your company’s liquidity in the MD&A section of the annual report. Look for information about the ability of the company to satisfy short-term cash needs and the ability to generate operating cash flows, for example.

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Our liquidity is dependent on the cash we generate from operating activities and our financing arrangements. Had a 19.1 million dollar increase in cash and cash equivalents from the prior year.

Capital Resources:

Recap what you find about your company’s capital resources in the MD&A section of the annual report. Look for information about cash reserves and credit availability. For example, your company’s MD&A section may have a disclosure about an established lined of credit to fund future growth.

We have been able to generate sufficient funds from our operations to meet our working capital requirements and typically finance our aircraft through secured debt financing. They had no outstanding borrowings under the Revolving Credit Facility and $56.9 millionavailable (net of various outstanding letters of credit).

Reports by ManagementChapter 2: Reports by Management – Question 1

Review the Management’s Report (Responsibility) on Internal Control over Financial Reporting in your company’s annual report. Answer the following questions.

Who is responsible for maintaining the internal controls designed to provide reasonable assurance that the books and records reflect the transactions of the company?

Their management team including the CEO and CFO.

Record the statement that identifies management’s conclusion about internal controls.

Based on their assessment, we concluded that, as ofDecember 31, 2011, the Company’s internal control over financial reporting was effective to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith U.S. generally accepted accounting principles.

Who audited management’s assessment of the effectiveness of your company’s internal control over financial reporting?

Ernst & Young LLP

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Independent Auditors’ ReportChapter 2: Independent Auditors’ Report – Question 1

Review the Independent Auditors’ Report of your company’s annual report and answer the following questions.

Who was the company’s auditor and where is it located?

Ernst & Young LLP – Honolulu. HI

What is the responsibility of the auditor?

They are responsible for obtaining reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Who is responsible for the preparation of and information within the company’s financial statement?

The accounting department of the company itself.

The audit was conducted in accordance with what?

COSO criteria (Committee of Sponsoring Organizations of theTreadway Commission) and GAAP (General Accepted Accounting Principles).

What was the opinion of the auditor?

In our opinion, Hawaiian Holdings, Inc. maintained, in all material respects, effective internal control over financialreporting as of December 31, 2011, based on the COSO criteria.

Five- or Ten-Year Summary of Operating ResultsChapter 2: Five- or Ten-Year Summary of Operating Results – Question 1

Identify the major components provided in the five- or ten-year summary. Summarize the insight provided by each. Look for stable, increasing, or decreasing trends. Consistent, slightly improving performance signals management has control of the business. Inconsistent performance signals management does not have control of the business.

Component

Example: The Home Depot Statement of Earnings Data

Summary of Insight

Sales and earnings have grown significantly over time.Operating expenses are growing at an increasing rate.

Revenue passengers flown Operating revenue has grown at an increasing rate over the past three years.

Operating Expenses Operating expenses were $1.63 billion, $1.22 billion, and $1.08 billion for the years ended December 31,

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2011, 2010and 2009, respectively.

Aircraft fuel increases Aircraft fuel expense increased $190.3 million, or 58.9%, in 2011 compared to 2010 and increased $79.1 million, or32.4% in 2010 compared to 2009.

Maintanence materials and repairs expense

Maintenance materials and repairs expense increased by $45.9 million, or 37.0%, in 2011 compared to 2010, primarilydue to additional expenses under power-by-the-hour (PBH) arrangements for our Airbus A330-200 fleet additions during 2011

Rentals and landing fees Other rentals and landing fees increased $14.6 million, or 25.3%, in 2011 compared to 2010 and $6.5 million, or12.7%, in 2010 compared to 2009, primarily due to increases in joint use and space rent at our Hawaii airports and increases inrent expense and landing fees due to the addition of new routes in 2010 and 2011.

Income Tax (Benefit) Expense

We recorded income tax expense of $1.6 million during 2011 and income tax benefits of $28.3 million and$19.5 million during 2010 and 2009, respectively.

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CHAPTER 3 - FINANCIAL STATEMENTSThe Balance SheetChapter 3: Balance Sheet – Question 1

Identify the date shown at the top of your selected company’s balance sheet.

Current Year Prior Year

2011 2010

Does the company’s fiscal year follow the calendar year? Yes

If not, why do you think it is different?

N/A

Chapter 3: Balance Sheet – Question 2

Review the current asset section of your selected company’s balance sheet. Explain why the order of individual items begins with cash. In your opinion, would it be more or less appropriate to order these items according to dollar magnitude? Explain.

These items are ordered this way based on liquitidy, meaning how fast an item can turn into cash. I think it would be fair to order the items based on their quantity level, but this is the way GAAP requires so that is how it will be done.


Review your company’s balance sheet (or SEC Form 10-K) and compare accumulated depreciation to the historical cost of Plant and Equipment (PE) using the following ratio.

Compute the following:

Accumulated depreciation /

Plant and Equipment

181,599/729,127 = 0.25

Percentage of Asset Life Remaining

High percentage means older assets

Low percentage means newer assets

Is the investment in fixed assets, on average, relatively recent? If not, can we assume that these assets will be replaced shortly?

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Yes, for the most part the fixed assets on their books are recent since they doubled their flight equipment inventory in the last year.


Since property, plant, and equipment (PPE) and long-term investments in stock represent a company’s investment, why do we distinguish between them in the balance sheet?

Because PPE are more liquid than long-term investments and thus go ahead of the stocks on the balance sheet.


Review the noncurrent asset section of your company’s balance sheet. Are any intangible assets listed? If so, identify the types of intangible assets and the percent of total assets that the intangible assets represent.

Intangible Asset 1:Intangible Assets $45,368

Intangible Asset 2:Goodwill $106,663

Intangible Asset 3:Click here to enter text.

Total Intangible Assets Total Assets = 0.072 = 7.2%

If this company were to be acquired by another company, would the intangible assets influence the purchase price? Explain your answer.

Yes the positive good will that the company has established would increase its selling price if it were to be bought by a company. The company has a reputation of providing quality customer service with good/ well trained employees. This is not necessarily shown explicitly on the BS, but we can infer from the intangible asset that the company has reason to ask for more on its purchasing price given this number.


Now review your company’s total assets for the most recent year. What percentage of total assets is current? Noncurrent?

Current Noncurrent

33.58% 49.02%

Should companies have a greater investment in current assets or noncurrent assets, or does it depend on the nature of their business? Explain your answer.

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I think it depends on the nature of the business. If you are a company that manufactures some product you want to keep an eye on your fixed assets (the machines that make the product) because those are what is keeping your business flowing smoothly. However, in smaller businesses you will be much more focused on your current assets i.e. cash. Some businesses may not even have any fixed assets.


Review your company’s balance sheet. Does it report a deferred tax asset? A deferred tax liability? If so, are the deferred tax assets and/or liabilities reported as current or noncurrent?

Deferred tax asset? Yes Noncurrent

CurrentDeferred tax liability? Yes Noncurrent

Current


Identify the information that relates to the stockholders’ equity section of your company’s balance sheet.

Par value per share of common stock? $0.01

Number of common shares authorized? 118,000,000

Number of common shares issued? 52,291,091

Number of common shares outstanding? 50,729,573

Number of treasury shares held by the company? 2,070,214


Answer the following questions relative to the stockholders’ equity section of the balance sheet.

By what amount did retained earnings increase or decrease from the prior year?

$190,517

Was the increase or decrease in retained earnings equal to the company’s current year net income or net loss?

No*

* If No, then dividends were paid (or declared) by your selected company or certain events took place during the year where the accounting for the events directly affected the retained earnings account.


List (write-in) each financial statement element as shown in your company’s balance

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sheet.

Assets Liabilities Stockholders’ Equity

Cash and cash equivalents Accounts payable Special preferred stock

Restricted cash Air traffic liability Common stock

Accounts receivable Other accrued liabilities Capital in excess of par value

Spare parts and supplies Current maturities of long-term debt and capital lease obligations

Treasury stock

Prepaid expenses Accumulated pension and other postretirement benefit obligations


Deferred tax assets Click here to enter text. Click here to enter text.

Flight equipment Click here to enter text. Click here to enter text.


Identify the combined carrying values (dollar amounts) of the following selected account groups taken from your company’s balance sheet:

Account Groups Current Year

Prior Year

Increase or Decrease(in dollars)

Current Assets $499,531 $446,520 $53,011

Net Fixed Assets $729,127 $418,120 $311,007

Intangible and Other Noncurrent Assets $152,031 $175,383 (23,352)

Current Liabilities $488,820 $400,555 $88,265

Long-term Liabilities $351,397 $267,191 $84,206

Common Stock $507 $522 (15)

Additional Paid in Capital* $260,658 $245,947 $14,711

Retained Earnings $913,256 $572,439 $340,817

Other Equity Components (38,289) $42,152 (80,441)


Identify the three major balance sheet accounts, for example accounts receivable, accounts payable, inventory, etc. that changed the most from the prior year. What events

16

might explain these changes? Working to explain why these changes occurred contributes to a greater understanding about a company.

Account Explanation

Example:

Account Receivable

Example:

An increase in accounts receivable should coincide with an increase in sales, i.e., a 10% increase in sales would explain a 10% increase in accounts receivable. If accounts receivable are increasing and sales decreasing, the signal is unfavorable.

Inventory The company expanded their property, plant and equipment asset on their balance sheet the most mainly because they purchased a large amount of new planes within the last year. The planes were necessary to be able to increase their business to their new target cities they will be flying to and from in the future.

Cash & Cash Equivalents

The company saw an increase in cash due to the fact that they made a profit indicated by their income statement from last year (2011).

Accounts Receivable

Accounts receivable has increased in the last year because sales for the company have increased. These numbers should be in line with one another for the majority of companies.


Prepare a common-sized balance sheet (expressed in percentages) using the following account groups shown in your selected company’s balance sheet.

Account Group Current Year

Prior Year

Increase or Decrease(current year percent minus

prior year percent)

Current Assets 37.4% 38.6% -1.2%

Net Fixed Assets 54.6% 36.2% 18.4%

Intangible and Other Noncurrent Assets 8.0% 25.2% -17.2%

Total Assets 100% 100%

Current Liabilities 32.9% 35.8% -2.9%

Long-term Liabilities 23.6% 23.9% -0.3%

Common Stock 0.03% 0.05% -0.02%

Additional Paid in Capital 17.52% 22.0% -4.48%

Retained Earnings 11.3% 7.4% 3.9%

Other Equity Components -2.57% 2.8% -5.37%

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Total Liabilities and Stockholders’ Equity

100% 100%

Example provided because of common student error in completing this report. All accounts groups divided by total assets, in dollars.

Account Group Current Year

Prior Year Increase or Decrease

Current Assets 40% 35% 5%

Net Fixed Assets 40% 45% -5%

Intangible and Other Noncurrent Assets 20% 20%

Total Assets 100% 100%

Current Liabilities 60% 50% 10%

Long-term Liabilities 10% 15% -5%

Common Stock 20% 20%

Additional Paid in Capital 5% 5%

Retained Earnings 5% 10% -5%

Other Equity Components

Total Liabilities and Stockholders’ Equity

100% 100%


Identify the three balance sheet groups from question 13 above that changed most significantly. Within each of these groups, identify the primary balance sheet element that drove this change. What events might explain these changes?

Group Name:

Current Assets

Explanation:

(Example – sales increased by 22%, thus accounts receivable increased by approximately 22%)

Net Fixed Assets Net fixed assets increased by 18.4% from the prior year mainly because the company purchased a large amount of inventory in the current year.

Noncurrent Assets Their noncurrent assets account has increased due to their additional inventory they purchased in the current year. Their long-term payments segment specifically increased to be able to pay for this purchase of revenue in a proper manner.

Other Equity Items such as accumulated income decreased from the prior year most likely due to their purchase of inventory and

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Components investment of other services to be able to eventually grow their business.


Did your company become more or less liquid when comparing this year to last year?

Current Year:

Current Assets minus Current Liabilities =

$10,711

Prior Year:

Current Assets minus Current Liabilities =

$45,965

Explain why?

The company became less liquid in the current year because their accounts receivable and accounts payable went up within the last year. This means that some of their cash has been tied up with other entites at the moment. This was due to all of the recent purchases within the current year.


Did your company increase or decrease its financial leverage when comparing total debt to total stockholders’ equity from this year to last?

Current Year:

Total debt Total stockholders’ equity =

1.9

Prior Year:

Total debt Total stockholders’ equity =

0.62

Explain why:

The company was able to increase their financial leverage by buying fixed assets for their business.

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The Income Statement or Statement of EarningsChapter 3: Income Statement – Question 1

Review the heading of your company’s income statement. Does the company’s income statement provide two or three years of comparative information? (Insert number to the right.)

3 yrs.

Why do you think the SEC requires that balance sheets provide two years of comparative financial information and income statements provide three years of comparative financial information?

The SEC requires three years on the Income Statement but only two on the Balance Sheet because the balance sheet requires the numbers from the prior years income statement in order to produce the numbers it needs. For example, retained earnings needs the ending RE from the prior year in order to calculate the current year.

Chapter 3: Income Statement – Question 2

Review the middle section of your company’s income statement. Did operating income (loss) increase or decrease from the prior year and by how much? You may have to compute operating income (loss).

Increased by $ Click here to enter text. Decreased by $70,995


Does the middle section of your company’s income statement show a nonoperating income (loss) increase or decrease from the prior year and by how much? You may have to compute nonoperating income (loss).

Increased by $ Click here to enter text. Decreased by $ 12,076


In reference to why you are studying this company, is it important to know the different sources of income—operating or nonoperating?

Yes, you want to know how profitable the business is in the short run (operating) along with what its potential could be (shown through nonoperating).


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If any of the irregular events are shown on your company’s income statement, describe the nature and the amount. Select the most current year affected by the event if multiple years are affected.

Irregular Event Amount Nature of the Change

Restructuring charge? - N/A

Discontinued operation? - N/A

Extraordinary event? $82,250 Aircraft and passenger servicing


Review the lower section of your selected company’s income statement. Did net income (loss) increase or decrease from the prior year and by how much?

Increased by $ Click here to enter text. Decreased by $ 112,904


Prepare a common-sized income statement for the categories below.

Account/Category Current Year


(current year percent minus prior year percent)

Net Sales (revenues) 100% 100%

Cost of Goods/Services (if applicable) N/A N/A N/A

Gross Profit 100% 100% -

Operating Expenses 98.77% 93.03% 5.74%

Operating Income (Loss) 1.2% 7.0% (5.8%)

Nonoperating Income (Loss) (1.2%) (0.71%) (0.49%)

Income Tax Expense 0.1% (2.2%) 2.3%

Net Income (0.2%) 8.4% (8.6%)

Example provided because of common student error in completing this report. All account categories divided by net sales (revenue), in dollar.

Account/Category Current Year


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Net Sales (revenues) 100% 100%

Cost of Goods/Services (if applicable) (35%) (36%) (1%)

cost of goods sold decrease

Gross Profit 65% 64% 1%

gross profit increase

Operating Expenses (25%) (23%) 2%

expenses increased

Operating Income (Loss) 40% 41% (1%)

operating income

decreased

Nonoperating Income (Loss) 5% 5%

Income Tax Expense (20 %) (17%) 3%

taxes increased

Net Income 25% 29% (4%)


Identify the three income statement accounts/categories that changed the most in Question 7. What events might explain these changes?

Account or Category:

Explanation:

(Hint – the MD&A section will provide good information to answer this question.)

Operating Expenses

Operations have expanded by approximately 18.6% (measured in ASMs) in 2011 compared to 2010 primarily dueto additional aircraft in our fleet (including aircraft that were only in operation for part of the year in 2010), as well as theintroduction of the larger capacity Airbus A330-200 aircraft to our fleet

Net Income Net Income decreased largely in part to the company’s expenses incurred through purchase of new inventory and services.

Operating Income They lost operating income within the past year partly due to rising

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(Loss) prices for gasoline. It has increasingly become more difficult for companies in the airline industry to be able to afford rising gas prices whie maintaining competitive prices appealing to consumers.


Identify your company’s Basic and Diluted EPS amounts. Place a N/A in Diluted EPS if not reported.

Basic EPS Diluted EPS

Current year $(0.05) $(0.05)

Preceding year 1 $2.15 $2.10

Preceding year 2 $2.26 $2.22

Why is diluted EPS always equal to or less than basic EPS?

Because companies almost always have additional potential outstanding shares in the form of convertible securities and warrants.

Statement of Cash Flows (SCF)Chapter 3: SCF – Question 1

Is the SCF dated in the title for a period of time similar to the income statement or for a point in time similar to the balance sheet? Why?

The SCF is dated similar to the Income Statement because that is the document that makes up the SCF.

Chapter 3: SCF – Question 2

Identify the following sections of the SCF and record the amounts. Check the math by summing to the cash balance at end of year. Verify that the ending cash balance reported on the SCF is the same as reported on the balance sheet.

Section Current Year

Prior Year Second Prior Year

Net operating cash flows 178,764 150,297 136,451

Net investing cash flows (281,903) (108,673) (35,940)

Net financing cash flows 122,217 (57,325) (3,645)

Net increase (decrease) in cash flows 19,078 (15,701) 96,866

Cash balance at beginning of year 285,037 300,738 203,872

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Cash balance at end of year $304,115 $285,037 $300,738

Does the total match balance sheet cash? Yes YesYes Yes


Record net sales, net income and net operating cash flows below. All three should be trending in approximately the same direction. If so, this is a sign of a well-run business. If one or more are going in a different direction, or random, then you must keep an eye open for an explanation why.

Item Current Year Prior Year Second Prior Year

Net Sales 19,078 (15,701) 96,866

Net Income $(2,649) $110,255 $116,720

Net Operating Cash Flows

178,764 150,297 136,451

Explain why net sales, net income and net operating cash flows are trending together or differently. (Hint: Look at depreciation expense and substantial changes in inventory, accounts receivable and accounts payable balances. Explaining why is a key learning point.)

The reason why all three of these accounts are differing from one another is because there has been a significant increase in inventory purchased by the company in the last year or two. Also, accounts receivable and payable have increased dramatically within the last year which would explain the dysfunctional numbers between net sales and net income.


Identify the primary cash outflows and inflows from investing activities.

Description of Activity Amount

Cash outflow: Property, Plant, and Equipment (281,903)

Cash inflow: Sale of Short and Long-term Investment 141,410

Consider three key issues at this point. Is the company adding assets? This is a sign of growth. Is the company replacing assets? This is a sign of growth and stability. Is the company only selling assets? This is a sign of retrenchment.

1. The company is adding assets in the form of new inventory (planes). This

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is shown on the BS with an increase in its inventory account.

2. Yes, it is replacing its assets. In the MD&A it mentions that the company purchased new planes to replace some of their inventory that was becoming outdated.

3. No, they both equally selling and adding their assets to improve their business through time.


Identify the primary cash inflow and outflow from financing activities.

Description of Activity Amount

Cash inflow: 132,000

Cash outflow: (Note: cash dividends paid are reported here.) (80,023)

Consider two key issues at this point. How is the company being financed, through debt or equity? Can you determine which is growing faster and why? A sound corporate strategy is to finance a company with debt during stable times, because this demands regular payment of principal and interest, and to finance a company with equity during unstable times, because leadership can elect to pay or not pay dividends.

Since the company has been growing over the past few years, leads me to believe that they are being financed through debt.

The Statement of Stockholders’ Equity (SSE)Chapter 3: SSE – Question 1

Identify the elements that comprise the statement of stockholders’ equity section of your company. Hint: These items are generally illustrated across the top of the page using a columnar format. (Example. Common stock – shares and dollar amount.)

Common Stock, Special Preferred Stock, Treasury Stock, Capital in Excess of Par Value, Accumulated Income (Deficit), and Accumulated Other Comprehensive Income (Loss)

Chapter 3: SSE – Question 2

Identify the cash dividends per share. $0

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Determine the dividend payout percentage. A company’s dividend payout percentage is computed by dividing dividend per common share by net income or earnings per common share. (Hint: If your company reported a net loss for the year, the answer lacks meaning.)

$0

Compute dividend yield. A company’s dividend yield is computed by dividing dividend per common share by market price per common share. (Hint: Use the current per share price for your selected company.)

$0

Is your company’s dividend yield a reasonable return given current market conditions?

No cash dividends reported

Notes to the Financial Statements Chapter 3: Notes to the Financial Statements – Question 1

How does your company define “cash and cash equivalents”?

The Company considers all investments with an original maturity of three months or less at the date of purchase to be cash equivalents.

Chapter 3: Notes to the Financial Statements – Question 2

How does your company value its “inventories”? Explain the meaning of the inventory valuation method. Are domestic and international inventories valued the same? Service companies will typically not have inventory.

My company is a service company and therefore will not have this section listed in their report.


Does your company report any investments in marketable securities? Identify the respective amount(s) invested.

Category Current Year Amount

Trading Securities $208,594

Available-for-Sale Securities None mentioned in report

Held-to-Maturity Debt Securities None mentioned in report


Note 1 and a separate note on income taxes should provide the information to answer

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this question.

What was your company’s income tax expense for the current year?

$1,567

How much cash was paid for income taxes in the current year? (Hint: Review the SCF. The difference generally relates to the accrual basis of accounting.)

($21.3) million

Identify the three major elements, such as depreciation or other post employment benefits, that gave rise to deferred tax assets or deferred tax liabilities:

Deferred Tax Assets Deferred Tax Liabilities

Accumulated pension and other postretirement benefits

Intangible assets

Leases Plant and equipment

Air traffic liability Other

What is this year’s effective tax rate for your company? What is the current year statutory rate?

Effective Tax Rate: % 218%

Statutory Tax Rate: % 35%


Reviewing note #1, any related supporting notes, and/or the 10-K, identify the fixed asset group(s), depreciation methods used, and the estimated useful lives of these fixed assets.

Fixed Asset Group Depreciation Method Estimated Lives (range)

Property and Equipment Straight-Line 7-10/7-20-25 years depending on the aircraft

Goodwill Indefinite lives – not amortized

annually

Click here to enter text. Click here to enter text. Click here to enter text.




Review the balance sheet, note #1, and any related notes and identify the amount of goodwill reported in the current year.

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Amount reported in current year. $ 106,663

Identify the amount of any significant write-down of goodwill that occurred during the current year.

$ 0

How does management describe how it accounts for goodwill as disclosed in the note(s) to the financial statements?

Goodwill and intangible assets with indefinite lives are not amortized, but are tested for impairment at least annually using a “two-step process”.


Given present executive compensation packages, why would the user of financial information prefer a company follow SFAS #123(R) instead of APBO #25? Explain.

The fair value method (SFAS #123) is the preferred sum amount of compensation expense and allocates it over the compensation (vesting) period. Whereas the (older) intrinsic vale method (APBO #25) typically would not calculate a compensation cost because it values the plan at the grant date by excess fair value (market price) over.


Review your company’s lease note (and related balance sheet information), then identify the following amounts:

Minimum lease payments under operating leases $86,507

Minimum lease payments under capital leases $435

Ratio of operating lease payments to capital lease payments

198.86%

As a user of reported financial information, would you be concerned about a significant amount of operating leases that are not reported in the balance sheet? Explain.

Yes, because I would want to know how much they were spending on those leases whether they will be able to bring in enough revenue to pay them off along with producing my dividends I expect to receive at the end of the year.


Review your company’s long-term debt note and identify the following (consider the three most significant liabilities only):

Instrument Maturity Date Rate Amount Due

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Airbus A330-200 Aircraft Facility Agreements

2023 5.3081% - 6.461% quarterly principle

$14.7 million

Boeing 717-200 Aircraft Facility Agreements

June 2019 8%, monthly principal

$39.7 million

Secured loan December 2013 3.66% monthly interest

$52.2 million

How much interest expense was recognized in the current year?

$24,521

How much cash was paid for interest in the current year? (Hint: Look in the SCF.*)

$25,706

*The difference between interest expense and cash paid for interest is due to the accrual basis of accounting (and in some cases, the capitalization of interest).


Review your company’s pension and OPEB note (if applicable) and answer the following questions.

Pensions OPEB

How much is the Projected Benefit Obligation (PBO) and Accumulated Postretirement Benefit Obligation (APBO) for your company at the end of the current year?

$381.9 million $156,197

What was the amount of pension or OPEB benefits paid to plan participants during the current year?

$4,426 $12,501

What amount of cash did the company contribute to the respective funds during the current year? This is known as “employer contributions.”

$18.5 million N/A

What is the value of the plan assets at the end of the current year?

$212,494 N/A

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Based on your review of the plan assets and the projected benefit obligation (or accumulated postretirement benefit obligation), has your company sufficiently funded its employee benefit plans (this is known as funded status)?

No it has not based on its funded status as of December 31 (noted in the table on pg. 61).

An expected average return on invested plan assets is used to reduce the volatility in the reporting of pension or OPEB expense. Higher expected average returns reduce pension or OPEB expense, and lower expected returns increase pension expense. What rate of return on plan assets does your company use to compute pension or OPEB expense? Does this appear reasonable, given present market conditions?

Rate employed? 3.80% Response: This appears reasonable given the tougher market conditions businesses have been facing in recent years.


Based on your review of the contingencies note, briefly identify specific events that have led to the accrual of contingent liabilities in your selected company’s the balance sheet.

The Company had capital commitments consisting of firm aircraft orders for sixteenwide-body Airbus A330-200 aircraft, six Airbus A350XWB-800 aircraft and six Rolls Royce spare engines scheduled for delivery through 2020. The Company has purchase rights for an additional three A330-200 aircraft and six A350XWB-800 aircraft and can utilize these rights subject to production availability.


Based on your review of the segment-reporting note to the financials, identify the reported operating segments, their related revenues, and operating income. Identify the largest three if more than three are disclosed.

Reportable Operating Segments

Net Sales Revenue Net Operating Income

Domestic $1,272,196 Not given

Pacific 378,263 Not given



Based on your review of the segment-reporting note to the financials, identify the geographical segments and their related revenues. Identify the largest three if more than

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three are disclosed.Country Net Sales Revenue

Domestic $1,272,196Pacific 378,263Click here to enter text. Click here to enter text.

Chapter 3: Notes to the Financial Statements—Question 14

Based on your review of the notes to the financials or the statement of stockholders’ equity, identify the components (no more than four) that comprise Other Comprehensive Income for your company.

Component Amount

Net change related to employee benefit plans 2,536

Unrealized income on short-term and long-term investments 1,184

Net change related to employee benefit plans, net of tax of$38,822

(67,061)

Net change related to employee benefit plans, net of tax of$2,040

(3,105)

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CHAPTER 4 - FINANCIAL ANALYSISSummary Financial Analysis Report

Profit Margin %

Answers how well the business performed.

Company Two Years

Prior

Company One Year

PriorCompany Industry S&P 500

Gross Margin Gross Profit /

Total Revenue 9.08%6.97% 1.2% 68.06% 47.37%

Pre-Tax Margin Operating Income

/ Total Revenue9.08% 6.97% 1.2% 20.20% 17.99%

Net Profit Margin Net Income /

Total Revenue

9.86%* 8.4%* (0.16%) 2.20% 5.98%

Sales Financial Statement

1,183,306 1,310,093 1,650,459 Not required Not required

Operating Income Financial

Statement107,484 91,278 20,283 Not required Not required

Operating Cash Flows

Financial Statement

136,451 150,297 178,764 Not required Not required

Evaluate Profitability (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find increasing performance, above or below industry average. For a company with a stability strategic focus you will likely find stable performance, above or below industry average. For a company in a retrenchment strategic focus you will likely find poor performance, below industry average with efforts to improve and approach industry average. Note: Sales, operating income and operating cash flows should trend in approximately the same direction. This signals a stable operating business environment. If the three measures are not trending together, this signals lack of control by management.)

In my opinion, the company is moving in the right direction, however, they are behind industry averages in many categories and are losing net income. This shows that they are doing well getting revenue in passenger sales, but are having a hard time sending that money to their bottom line. This indicated that a lot of their revenue gets tied up in their fixed expenses. Management needs to find a better way to budget these fixed expenses so the company can take their success in sales revenue and bring that to net income.

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Financial Condition

Signals ability to take on additional debt and liquidity.

Company Two Years

Prior

Company One Year

PriorCompany Industry S&P 500

Debt/ Equity Ratio

(Total Liabilities – Current Liabilities)

/ Total equity

N/A* 29.65%* 12.64% 136.74% 132.19%

Current Ratio Current assets /

Current liabilitiesN/A 111.47% 102.19% 3.02% 1.04%

Quick Ratio

(Cash and Short Term Investments

+ Short Term

Investments + Total Receivables,

Net) / Current Liabilities

N/A 86.11% 81.48% 1.63% 0.75%

Interest Coverage Data not readily

available

(470.6%)* (487%)* 4.41% 171.16% 129.80%

Evaluate Financial Condition (often labeled liquidity and solvency analysis) (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find stable or slightly decreasing liquidity, above or below industry average. Debt to equity often is increasing in a growing company. For a company with a stability strategic focus you will likely find stable liquidity, above or below industry average. Debt to equity often is stable as well. For a company with a retrenchment strategic focus you will likely find poor liquidity, below industry average with efforts to improve and approach industry liquidity. Debt to equity often is decreasing in a company during retrenchment.)

The company is in retrenchment based on the calculations above because the Debt to Equity ratio is decreasing signaling that the company is not being able to afford to pay off its debit that they owe as well as they have in the past.

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Investment Return %

Signals performance for managers and owners.

Company Two Years

Prior

Company One Year Prior

Company Industry S&P 500

Return On Equity Net Income /

Total Equity

N/A* 24.51%* (0.41%) 22.27% 53.75%

Return On Assets Net Income /

Total Assets

N/A* 9.87%* (0.18%) 15.41% 6.65%

Return On Equity

(5-Year Avg.)

Not required Not required (0.41%) 22.33% 16.63%

Return On Assets

(5-Year Avg.)

Not required Not required (0.18%) 15.30% 6.37%

Evaluate Investment Return (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find increasing returns. For a company with a stability strategic focus you will likely find stable investment returns. For a company in a retrenchment strategic focus you will likely find poor and stable investment solvency, below industry average.)

The company based on these numbers has a poor and stable investment solvency, which is below industry average. These poor numbers are largely due to their poor net income. This goes back to the original problem I addressed above. The company has to find a way to send their revenues generated to the bottom line.

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Management EfficiencySignals how well the company was run by management.

Company Two Years

Prior

Company One Year Prior

Company Industry S&P 500

Income/Employee

Not required Not required $217,130 Could not be found

Could not be found

Revenue/Employee

Not required Not required $398,180 $372,773 Could not be found

Receivable Turnover

Total Revenue /Average Accounts Receivable - Trade, Net

N/A 4.57% 5.7% 5.36% 10.42%

Average is defined: (beginning of the year + end of the year) / 2

Inventory Turnover

Cost of Revenue,

Total / Average Total Inventory

N/A N/A N/A N/A N/A

Asset Turnover

Total Revenue / Average Total

Assets

N/A 117.23% 110.95% 1.08% 0.61%

Evaluate Management Efficiency (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find improving efficiency, above or below industry average. For a company with a stability strategic focus you will likely find stable efficiency, above or below industry average. For a company in a retrenchment strategic focus you will likely find poor efficiency, below industry average with efforts to improve and approach industry average.)

Based on the numbers above, the company seems to be pretty stable with their asset turnover and receivable turnover ratios high and consistent among that of the industry.

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CHAPTER 5 - DECISION-MAKING PROCESSChapter 5: Decision-making Process – Question 1

Based upon your review, do the numbers support the company’s explicit strategic focus: a growth, stability or retrenchment focus? Why or why not?

I believe that some of these numbers do not support the company’s focus of increasing growth for the future. In order for their company to be truly profitable long-term they have to start paying off their fixed assets, which I believe they will be able to do. Although their numbers for this year are down and below average, this is mainly because they have purchase some a large amount of new inventory (planes) that they have not put in service yet. Their hope is that once they get these new planes operational they will be able to increase their revenue and eventually cover their fixed costs.

Chapter 5: Decision-making Process – Question 2

Return to the first question in this project. Chapter 1: Identify Why You Selected This Company—Question 1

A) What is/are your motivation(s) or interest(s) in selecting this company?

B) What question(s) are you seeking to answer?

You were asked to explain why you were investigating this company’s annual report. You have likely uncovered numerous pieces of information, some with conflicting insight. This may involve both financial and nonfinancial information. In addition, you may have found certain information to be incomplete for decision-making purposes. This is real world analysis. Most business decisions are made with as much reliable information as possible, yet common to the decision-maker is a desire for more information.

Prepare a thorough, yet concise answer to your original questions A and B above. For example, would you work for this company, why or why not? Support your response with the information gathered throughout your annual report study.

I wanted to look at Hawaiian Airlines from a financial perspective because I flew on their airline this past summer and was curious to see how profitable they were. By going through their annual report I realized that even though they didn’t have the best year in 2011, they seem to be a successful company that is continuing to expand into new markets to gain more customers and opportunities. In my opinion, I would work for this company because I do believe that it will turn around its below average performance from last year and eventually become profitable again like it was in 2009 and 2010. Their investment for the future (with the recent purchase of new AirBus and Boeing planes) has given me confidence that they believe they will continue to grow and thrive as a company in the airline travel business.

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Chapter 5: Validate Your Conclusion – Question 1

The Altman Z-score is a predictive model created by Edward Altman in the 1960’s. The score combines and weights five financial ratios to estimate the likelihood of a company going bankrupt. The lower the Altman Z-score the higher the odds of bankruptcy. Research findings suggest the Z-score predicts 72 - 80% of corporate bankruptcies two years prior to the actual filing.

Z-score > than 3 = considered healthy

Z-score between 1.8 and 3 = considered a warning sign

Z-score < than 1.8 = could be headed for bankruptcy

Computing the Z-score for your company is very simple. Go to one of the Websites listed below and compute the Z-scores for the respective years identified below. Print out your results and turn them in with this workbook.

www.jaxworks.com/calc2a.htm

www.ironwoodadvisory.com/zscore.htm

Two Years Prior One Year Prior Current Year

Z-score

Don’t have data for all sections the

system demands

2.7686 2.2629

Z-score interpretation compared to the financial analysis. Does the Z-score agree or disagree with your analysis?

The Z-score actually predicts similar results to what I concluded. Given the score for the current year means the company is somewhat in danger but is still in good shape for the moment. As you can see, their Z-score for the current year is lower than their score from the previous year. This indicates their drop in net income. So in conclusion, this score aligns with my analysis of their financial statements: they are in decent shape, but have done and hopefully will do better in the upcoming years. My prediction is that they will start to improve their income as they start to see the rewards of their new purchased inventory kick-in.

Congratulations.

Now submit to your instructor your completed workbook per the instructions provided at the beginning of this document.

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