Accounting Characteristics Pricing Models -Myassignmenthelp.Com

Question: Discuss About The Accounting Characteristics Pricing Models? Answer: Introduction Financial analysis is a process of measuring viability and profitability of a business or a business project. It includes the analysis of the financial statements of the company, which are prepared at the end of fiscal year. It helps in assessing the liquidity, efficiency, profitability of its business and shows its overall finance structure (Vogel, 2014).This report contains a critical examination of the financial performance and position of Salesforce over the past three years and its comparison with its competitor company named as Cisco Systems. Both the companies are in the list of Worlds best workplace 2017, according to Great Place to Work Institute. The evaluation is done to know about how the company is performing in financial aspects and what it is contributing to the overall development of the country (Lee, Lee Lee, 2009). Salesforce is an American cloud computing company having its headquarters in San Francisco, California. Most of its revenue comes from Customer Relationship Management (CRM) product and is considered to be the worlds first CRM platform. Salesforce topped the list of best workplaces 2017 generated by the Great Place to Work Institute. The company sells products like sales cloud, Salesforce CPQ, service cloud, commerce cloud and many other commercial applications of social networking. It is listed on New York Stock Exchange with a symbol of CRM and is a component of SP 500 Index ("Salesforce", 2018). Cisco systems, Inc. is a multinational technology company operating in America. The headquarters of the company are situated in San Jose, California. Cisco deals in manufacturing and selling of networking hardware, telecommunications equipment and other products and services of high psychology. It ranked 19th on the list of best workplaces, according to Great Place to Work Institute. The company is one of the competitor of Salesforce and its people and products helps in connecting the society securely and seizing tomorrows opportunity today ("Cisco - Global Home Page", 2018). Financial data Consolidated income statement for past three years Particulars 2015 2016 2017 US$ US$ US$ Sales 5,373,586 6,667,216 8,391,984 Cost of Sales 1,289,270 1,654,548 2,234,039 Gross Profit 4,084,316 5,012,668 6,157,945 Operating Expenses 4,229,949 4,897,745 6,093,717 Income/loss from operations -145,633 114,923 64,228 Investment income 10,038 15,341 27,374 Interest Income -73,237 -72,485 -88,988 Other Income -19,878 -15,292 9,072 Gain on sales of land and building improvements 15,625 21,792 0 Gains from acquisitions of strategic investments 0 0 13,697 Income before income tax -213,085 64,279 25,383 Benefit from income tax -49,603 -111,705 154,249 Net income/loss -262,688 -47,426 179,632 ("Salesforce", 2018). Earnings Per Share Basic - 0.42 - 0.07 0.26 Diluted - 0.42 - 0.07 0.26 Consolidated balance sheet Particulars 2015 2016 2017 US$ US$ US$ Assets Current Assets cash and cash equivalents 908,117 1,158,363 1,606,549 Marketable securities 87,312 1,567,014 602,338 Accounts receivable 1,905,506 2,496,165 3,196,643 Deferred commissions 225,386 259,187 311,770 Prepaid expenses and other current assets 280,554 250,594 279,527 Land and Building improvements held for sale 143,197 Total current assets 3,550,072 5,731,323 5,996,827 Marketable securities, noncurrent 894,855 Property and Equipment, net 1,125,866 1,715,828 1,787,534 Deferred commissions, noncurrent 162,796 189,943 227,849 Capitalized software, net 433,398 123,065 141,671 Strategic investments 520,721 566,953 Goodwill 3,782,660 3,849,937 7,263,846 Intangible assets 490,006 1,113,374 Other assets 628,320 142,097 486,869 Restricted cash 115,015 Total assets 10,692,982 12,762,920 17,584,923 Liabilities and Stockholders' equity Current Liabilities Accounts payable 1,103,335 1,349,338 1,752,664 Deferred revenue 3,286,768 4,267,667 5,505,689 Total current liabilities 4,390,103 5,617,005 7,258,353 Deferred revenue, noncurrent 34,681 23,886 37,113 Convertible 0.25% senior notes, net 1,070,692 1,088,097 1,116,360 Term loan 0 0 497,221 Loan assumed on 50 Fremont 197,998 198,268 Revolving credit facility 300,000 0 196,542 Other noncurrent liabilities 922,323 833,065 780,939 Total liabilities 6,717,799 7,760,051 10,084,796 Stockholders' equity 3,975,183 5,002,869 7,500,127 Total liabilities and stockholders' equity 10,692,982 12,762,920 17,584,923 ("Salesforce", 2018). Cisco Systems, Inc. Consolidated income statement for past three years Particulars 2015 2016 2017 US$ US$ US$ Sales 49,161 49,247 48,005 Cost of Sales 19,480 18,287 17,781 Gross Profit 29,681 30,960 30,224 Operating Expenses 18,911 18,300 18,251 Income/loss from operations 10,770 12,660 11,973 Interest expense -566 -676 -861 Interest Income 769 1,005 1,338 Other Income 228 -69 -163 Income before income tax 11,201 12,920 12,287 Provision for income taxes 2,220 2,181 2,678 Net income/loss 8,981 10,739 9,609 ("Annual Report", 2017). Earnings Per Share Basic 1.76 2.13 1.92 Diluted 1.75 2.11 1.90 Consolidated balance sheet Particulars 2015 2016 2017 US$ US$ US$ Assets Current Assets cash and cash equivalents 6,877 7,631 11,708 Investments 53,539 58,125 58,784 Accounts receivable 5,344 5,847 5,146 Inventories 1,627 1,217 1,616 Financing receivables, net 4,491 4,272 4,856 Other current assets 1,490 1,627 1,593 Total current assets 73,368 78,719 83,703 Financing receivables, net 3,858 4,158 4,738 Property and Equipment, net 3,332 3,506 3,322 Deferred tax assets 4,454 4,299 4,239 Goodwill 24,469 26,625 29,766 Intangible assets 2,376 2,501 2,539 Other assets 1,516 1,844 1,511 Total assets 113,373 121,652 129,818 Liabilities and Stockholders' equity Current Liabilities Short-term debt 3,897 4,160 7,992 Accounts payable 1,104 1,056 1,385 Income Tax payable 62 517 98 Accrued compensation 3,049 2,951 2,895 Deferred revenue 9,824 10,155 10,821 Other current liabilities 5,476 6,072 4,392 Total current liabilities 23,412 24,911 27,583 Income Tax payable 1,876 925 1,250 Deferred revenue, noncurrent 5,359 6,317 7,673 Long term debt 21,457 24,483 25,725 Other long term liabilities 1,562 1,431 1,450 Total liabilities 53,666 58,067 63,681 Stockholders' equity 59,707 63,585 66,137 Total liabilities and stockholders' equity 113,373 121,652 129,818 ("Annual Report", 2017). Ratio analysis Ratio analysis is the most commonly used technique for doing the financial analysis of the companys final accounts. There are different type of ratios which are used to measure the liquidity, efficiency, profitability and the capital structure of the company. A comparative analysis of companys financial performance with the industry average or a trend analysis over the past years, can be done by calculating ratios (Fraser, Ormiston and Fraser, 2010). There are various ratios categorized as liquidity ratios, profitability ratios, efficiency ratios, activity ratios and capital gearing ratios. It is considered to be the most desirable method which includes evaluation of the financial performance by using current or historical financial data (Warren Jones, 2018). Comparing over the past 3 years These ratios indicates that how quickly a company can convert its assets into cash or liquid form. Calculation of these ratios is done to measure the liquidity of the company. They generally evaluate the companys ability to pay off its short-term obligations. There are two types of liquidity ratios (Zainudin and Hashim, 2016). Liquidity ratio Years 2015 2016 2017 Current ratio 0.81 1.02 0.83 Quick ratio 0.74 0.98 0.79 Current ratio: it is a type of liquidity ratio that determines companys capability of paying off its short-term debts with its current assets. It measures the relationship between firms current assets and current liabilities. Cash and cash equivalents, marketable securities are the current assets that company have, which can be easily converted into liquid form. The ideal current ratio is 2:1 and is calculated by dividing CA with CL (Saleem and Rehman, 2011). As per the calculations done, it can be said that the CR of Salesforce has increased in 2016 as compare to 2015 from 0.81 to 1.02, but the same has been reduced in 2017 to 0.83. The reason for this increase during 2015-2016 was a rise in the value of cash and cash equivalents and marketable securities. These assets can easily be converted into cash and can be used to pay the short term debt. In 2017, the ratio is reduced because a large portion of current assets was engaged in accounts receivables, which can or cannot be convertible into cash within one year. Moreover, the value of deferred commissions and prepaid expenses has also increased as compare to 2016. Overall, there was a slightest increase in total current assets as compare to the change in total current liabilities from 2016 to 2017. Quick Ratio: it is also known as acid test ratio. It measures companys potential to pay its current liabilities with its quick assets. Current assets like cash, marketable securities, cash equivalents and account receivables are considered to be quick assets as they can be easily converted into cash. The ideal ratio is 1:1 and is calculated by dividing QA with CL (Krantz Johnson, 2014). The same trend follows in case of Quick ratio. It has increased in 2016 and then decreased in 2017. The reasons for the fluctuations are same as of in case of current ratio. The quick ratio of Salesforce over the past 3 years remains less than the ideal ratio of 1:1. Having a ratio of 0.98 in 2016 means the company can pay off almost all of its liabilities with its quick assets. A ratio of 0.79 in 2017 implies that Salesforce can settle 80% of its current liabilities. Efficiency ratios These ratios indicates how efficiently, a company is utilizing its resources to set off its liabilities. The ratios indicates the potential of the company to use its assets and manage its liabilities in the most efficient and effective manner (Tracy, 2012). Following are the efficiency ratios: Efficiency ratio Years 2015 2016 2017 Receivable turnover ratio 2.11 2.05 Creditor turnover ratio 1.35 1.44 Assets turnover ratio 0.57 0.55 Receivable turnover ratio: it presents how efficiently a company can collects its account receivables. A high DTR shows that the debt collection of the company is effective and that it is collecting cash from its debtors timely (Jindal and Jain, 2017). The DTR of Salesforce has reduced from 2.11 to 2.05. This implies that company is not collecting its receivables efficiently and timely because of its slow paying debtors. Creditor turnover ratio: it analyse the ability of the company to pay off its creditors. A high CTR is considered to be more desirable as it implies that the firm is paying off its liabilities frequently and regularly (Barman and Sengupta, 2017). An increase was there in Salesforces CTR from 1.35 to 1.44 in year 2017. This indicates that company pay off to its creditors very often and have enough liquidity for making the payments, despite of having slow paying receivables. One of the reason for this rise can be an increase in the value of Cash and cash equivalents during the year. Asset turnover ratio: it shows how well a firm utilizes its assets to generate revenue. The efficiency is measured by comparing net revenue with average assets. A high ratio indicates better performance of the company (Kieso, et.al. 2012). Salesforce ATR is slightly reduced in 2017 from 0.55 to 0.57. It implies that the companys ability making revenue with its assets is reduced in 2017 as compare to that of in 2016. Reasons being increase in purchases of fixed assets and in the value of strategic investment. Moreover, overall increase in total assets is more than the overall increase in total revenue during 2016-2017. Profitability ratios One of the main motive of conducting ratio analysis is to measure the profitability of the company or in other word to have an idea about its potential to earn profits from its operations. These ratios give an overview of firms profits made during a financial year. Following are the profitability ratios (Camilleri and Camilleri, 2017). Profitability Ratios Years 2015 2016 2017 Operating Profit Margin - 0.03 0.02 0.01 Net Profit Margin - 0.05 - 0.01 0.02 Return on Equity - 0.07 - 0.01 0.02 Operating Profit ratio: it indicates companys systematic cost control and profit earning after meeting all its operating expenses. A high operating profit ratio is more desirable than the lower one (Jenter and Lewellen, 2015). Calculation of this ratio gives an idea that OPR of the company was negative in 2015 and during 2016-17, it reduces from 0.02 to 0.01. One reason for declining operating profits is increasing operating expenses throughout the year. The operating expenses of Salesforce were continuously increasing from 2015. Net Profit Ratio: it is the most commonly used profitability ratio that represents the relationship between net profit after tax and total revenue. It shows the percentage of profit earned by the company with its operations after meeting all the expense including operating expenses, interest expense, taxes and preference share dividend (Kartio, Mirza and Shaikh, 2017). During the year 2015 and 2016, the net profit margin of Salesforce was negative 0.05 and 0.01 respectively, reasons being company was making loss during these years because the revenue earned during these years was not sufficient enough to meet all the operating and non-operating expenses. The trend changes in 2017, where company earned a profit of $179,632 with a positive ratio of 2%. The gain from the strategic investments and positive value of other income are added to the value of operating income, making Salesforce capable to meet all its expenses with revenue earned and make profits. Return on Equity: this ratio shows the efficient use of shareholders investment, by the company in order to generate profits. A high ROE is favourable for the company. Looking at the calculation of ROE, it can be said that, during first two years the trend was negative and it got reversed in 2017 when company had a positive ROE of 2%. Clearly the net income earned in 2015-16 was negative, making the ROE negative. Having a positive ratio in 2017 indicates that the company has earned profits and is performing better. It will be now able to give positive return to its shareholders (Penman, Reggiani, Richardson and Tuna, 2017). Capital structure ratios The ratios which tells about the overall capital structure of the company are known as capital structure ratios. In other words, these ratios refer to the degree of long term financing of a business (Bragg, 2012). Capital structure ratio Years 2015 2016 2017 Debt- equity 1.69 1.55 1.34 Interest coverage ratio 1.99 - 1.59 - 0.72 Debt-equity ratio: it compare the total debt of a firm with its total equity. A high D/E ratio indicates that the company has raised funds more from creditors rather than investors (Levi and Segal, 2015). A constant decrease was there in the ratio over the past three years which means that the portion of debt is reduced to an extent and Salesforce is raising funds from its investors. Interest coverage ratio: it indicates the capability of the company regarding its interest payments. Creditors generally used this ratio to know about the risk taking factor of the business (Ferrarini, Hinojales and Scaramozzino, 2017). In year 2015, Salesforce had a coverage ratio of 1.99 that means it was paying its interest timely. But the trend changed in 2016-2017 and the company reported negative ICR. Reason was the lack of income to pay the required interest expense. Comparing with Cisco Corporation Liquidity ratio Years 2015 2016 2017 Current ratio 3.13 3.16 3.03 Quick ratio 3.06 3.11 2.98 The current ratio of Cisco is far better than Salesforce. It has increased during year 2015-2016 and in 2017, the ratio was 3.03 which slightly lower than that of 2016. This implies that company has enough current assets to meet its current liabilities. A large portion of its assets is in the form of cash and less amount is engaged in inventory. Cisco is much more capable in meeting its short term debt than Salesforce. Ciscos Quick ratio is also higher than Salesforce, although declined in 2017. The ratio is more than the ideal ratio of 1:1, reason being it has more liquid cash in proportion to its liabilities and also the company is capable of utilising its assets in making investments rather than holding them in inventories. Efficiency ratio Years 2015 2016 2017 Receivable turnover ratio 5.96 5.70 Creditor turnover ratio 16.93 14.57 Assets turnover ratio 0.42 0.38 The debtor turnover ratio of Cisco is much higher than that of Salesforce. It means it collects its debtors more efficiently and effectively. It can convert its receivables into cash faster than Salesforce as the debtors do not take long time to make the payments. Cisco has higher CTR because it has enough total revenue to pay off its creditors timely. Increase in its total revenue is much more in proportion to that of in its total creditors. From creditors point of view, a company who can pay them back regularly is much better than the one who make delays in payment. Asset turnover ratio of Cisco is lower than Salesforce which implies that the company is not good at generating revenue with its assets. Increase in purchase of fixed asset can be one of the reason for lower ATR. Profitability Ratios Years 2015 2016 2017 Operating Profit Margin 0.22 0.26 0.25 Net Profit Margin 0.18 0.22 0.20 Return on Equity 0.15 0.17 0.15 Cisco has positive OPR throughout the years as compare to Salesforce. It has high operating profit margin that shows its potential to make more profits with its operations. From investors point of view, it is better to invest in it as the company manages its ongoing operations so effectively and efficiently. It will be obvious that the NPR of Cisco will be more than Salesforce, because the company had not occurred any losses in the previous three years like Salesforce. It is able to maintain its profits very well. In comparison to Salesforce, return on equity of Cisco is higher and has also increased during 2015-2016. Looking at the profits earned, it can be said that the company is performing better and is providing high returns to its investors. Capital structure ratio Years 2015 2016 2017 Debt- equity 0.90 0.91 0.96 Interest coverage ratio 14.01 12.60 8.95 Cisco has low debt equity ratio as compare to Salesforce, which means the company is favourable to both creditors and investors. Having a low ratio indicates that most of the funds are raised through investors rather than creditors. There has been an increase in the stockholders equity of Cisco whereas accounts payables remains almost same over the past three years. The interest coverage ratio of Cisco has decreased during the years that is from 14.01% to 8.95% in 2017. This implies that companys ability of paying its interest expenses has reduced because of the increase in the interest expenditure over the periods and lack of funds. Though the ratio is more than the ratio of Salesforce. Conclusion As per the above analysis and interpretation, it can be said that the performance of Salesforce has improved in the year 2017. In the previous years, the company was occurring losses, but the trend changed in 2017 where it made a profit of $179,632. Though the company topped the list of best workplaces but, financially its performance was not promising in the past three years. Moreover, comparing it with Cisco systems, Inc., the latter company performed pretty well in its past years. Cisco is performing better than Salesforce at all grounds including profitability, efficiency and liquidity. References Annual Report. (2017).Cisco.com. Retrieved 17 January 2018, from https://www.cisco.com/c/dam/en_us/about/annual-report/2017-annual-report-full.PDF Barman, A.N. and Sengupta, P.P. (2017). DETERMINANTS OF PROFITABILITY IN INDIAN TELECOM INDUSTRY USING FINANCIAL RATIO ANALYSIS.International Journal of Research in Management Social Science, p.25. Bragg, S. M. (2012). 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