Financial Statements Declared by Ford Company - a Case Study

Date: 07.08.2011

Problem Statement:

Check whether the financial statements declared by Ford company are correct or any manipulations have been done to make the financial statements look good.

Case:

The ford motor company has been facing a bad time. Although its stock price reached $13.14, it is still 60% below its beginning 1999 price level.

The fact that the ford company is composed of two parts, automobile, which is the manufacture part, and the financial service, which engaged in vehicle-related financing, leasing, and insurance, cannot make this company be analysed separately, because the two parts are working together in this particular company and in this particular industry.

To re-act the market downturn, the ford company has this revitalization plan, which includes high-incentive spending, reduction of workforce and lots of other things. However, the first nine months of 2002, the ford company is facing a loss of 850 million dollars. This maybe the reason the Stand & Poor's lowered the company's long-term debt ration from BBB+ to BBB with a negative outlook.

Questions

1. Do you agree with the conclusion that "a meaningful amount of Ford's earning improvement over the past three quarters come from accounting adjustments, as opposed to real improvements in the company's underlying profitability?"

Yes, we agree that a meaningful amount of Ford's earning improvement over the past three quarters come from accounting adjustments, as opposed to real improvements in the company's underlying profitability.

Change in accounting principle are allowed only if

 Required by new GAAP

 Use of alternative accounting principle can be justified to be preferable.

The company adopted FIN46 for variable interest entities formed prior to Feb 1 2003. As a consequence the company consolidated several VIEs in the financial statement and recognized a cumulative effect of change in accounting principle of 264 million dollars.

2003 2002

Cumulative Effect of change in accounting principle -264 -1002

*All figures in millions

Previously company's profit underlie in provision for credit and losses.

2003 2002

Provision for credit and insurance losses 1802 2523

Percentage of sales 1.83% 2.53%

Here it is clearly depicted that 2.53 % of profit lies in the provision for credit and insurance losses. In the preceding year it was reduced up to 1.83%.

We can assume that the company would not adopt the new accounting principle then what is the impact on overall profitability in 2002 and compare it with 2003 when they adopted FIN6 principle.

The comparisons are shown in the table below

Accounting principle Before FIN6

Year 2002 2003

Income / loss from continuing operations $295 $1561

Income / ( loss ) from discontinued / held for sale operations $48 $4

Loss on disposal of continued / held for sale operations $95 $5

Cumulative effect of change in accounting principle $264

Profit $152 $1288

*All figures in millions

Here the profit in 2002 without changing the accounting principle was $ 152 million.

Total cost and expenses without adopting FIN6 = 120640.That is the almost 99.69 % of the sales.

Here we see that by changing accounting principle the company gain the profit by $ 1136 million.

The most important thing was happen that the total cost and expenses account 98.31 of sales figure.

So, that is the reason the company changed its accounting principle and so I agree with the conclusion.

2. What adjustments, if any, would you make to the 2003 first nine moth earning to determine if 2003 nine month earnings did or did not represent a real improvement?

As we already discussed the change in accounting principle represent a real improvement where we should make adjustment by seeing the profit and loss account statement:

Sales and revenue

Automotive sales 98719

Financial services 19727

Total sales and revenue 118446

Automotive interest income 727

Cost and expenses

Cost of sales 91205

Selling administrative and other expenses 18027

Interest expense 5709

Provision for credit and insurance losses 1802

Total Cost and expenses 116743

automotive equity in net income / loss of affiliated companies

Income loss before income taxes 48

Provision for/ benefit from income taxes 2478

Income loss before minority interest 245

Minority interest in income loss of subsidiaries

Income / loss from continuing operations 1561

Income / ( loss ) from discontinued / held for sale operations