Understanding Financial Reports

Topics: Generally Accepted Accounting Principles, Corporate finance, Balance sheet Pages: 6 (1388 words) Published: December 20, 2013
In module 2 case study I am to do the following understanding financial reports and continue to review the financial statements of Merck and Novartis to learn additional information. The emphasis of this Case is to review the income statement, balance sheet and computation of ratios. Review the financial statements for the companies and answer the following questions for the last reporting year: Balance Sheet

• What components of stockholders' equity does each of the companies disclose? oMerck & Company Inc
The components of the stockholders equity common stock (authorized and issued), other paid-in capital, retained earnings, accumulated other comprehensive loss, and treasury stock oNovartis International Ag

The components of the stockholders equity are share capital, treasury shares, reserves, and non-controlling interest. • Do the companies have preferred stock shares outstanding? If so, what special features do these shares contain? oMerck & Company Inc

Merck has authorized 20,000,000 shares of preferred stock in 2012. All preferred stock from the AMI a merger in 1998 is being converted to either cash or shares of Merck stock.

oNovartis International Ag
Novartis did not report any preferred stock
• Do either of the companies report treasury shares? If so, do the companies disclose the reason for reacquiring the shares? oMerck & Company Inc
Yes Merck reported treasury shares; they reported the purchase of treasury shares on the balance sheet in the equity section and also on the summary of common stock and treasury stock transactions. In this case no they didn’t disclose any reasons for reacquiring shares other than those from the merger. oNovartis International Ag

Yes Novartis reported treasury share; No they did not disclose reasons for reacquiring shares Income Statement
• What are the basic and diluted earnings per share for each company? oMerck & Company Inc
Basic earnings per common stock $2.03
Diluted earnings per common stock $2.00
oNovartis International Ag
Basic earnings per common stock $3.93
Diluted earnings per common stock $3.89
• Have the companies reported any discontinued operations? Merck & Company Inc
oMerck has not reported any discontinued operations
Novartis International Ag
oNovartis reported no discontinued operations for 2012
• Do the companies disclose any stock compensation plans? If so, are they reporting such plans under the fair value or intrinsic value methods? What was the value of compensation expense measured for any outstanding stock option plans? oMerck & Company Inc

Yes they are reporting under the fair value method.
The value of the compensation expense measured was approximately $72 million to the holders and $4 million Merck common shares issued. oNovartis International Ag
Novartis did not disclose any stock compensation plans
Financial Ratios
Compute the following ratios. Also, interpret and assess each group of ratios for the company. What type of story are the ratios telling the analyst? • Profitability ratios:
◦ Gross profit margin = Gross income/sales.
The gross profit margin is a financial ratio which is a measurement of a company's manufacturing and distribution efficiency during the production process. A company uses its gross income to fund such company activities as research and development and marketing, which are important for generating future sales. A prolonged decline in the gross profit margin is a red flag for possible impending negative pressure on sales and, ultimately, earnings. You need to know the trend of the company before you can make an analysis of whether or not the gross profit margin is good or not, in this case Novartis has a better gross profit than Merck. Merck & Company Inc

8,739/47,267 = .185
Novartis International Ag
11,243/56,673 = .198
◦ Net profit margin = Net income/ sale
Net profit is the profit that is generated from all phases of the business, including interest and...
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