Financial statement analysis cases

Reference no: EM13787227

Financial Statement Analysis Cases

Case 1: Merck and Johnson & Johnson

Merck & Co., Inc. and Johnson & Johnson are two leading producers of health care products. Each has considerable assets, and each expends considerable funds each year toward the development of new products. The development of new health care products is often very expensive, and risky. New products frequently must undergo considerable testing before approval for distribution to the public. For example, it took Johnson & Johnson 4 years and $200 million to develop its 1-DAY ACUVUE contacts lenses. Below are some basic data compiled from the financial statement of these two companies?

(All dollars in millions)	Johnson & Johnson	Merck
Total assets	$53,317	$42,573
Total revenue	47,348	22,939
Net income	8,509	5,813
Research and development expense	5,203	4,010
Intangible assets	11,842	2,765

Instructions:

1. What kinds of intangible assets might a health care products company have? Does the composition of this intangible matter to investors that is, would it be perceived differently if all of Merck's intangibles were goodwill than if all of its intangible was patents?

2. Suppose the president of Merck has come to you for advice. He has noted that by eliminating research and development expenditure the company could have reported $4 billion more in net income. He is frustrated because much of the research never results in a product, or the products take years to develop. He says shareholders are eager for higher returns, so he is considering eliminating research and development expenditure for at least a couple of years. What would you advise?

3. The notes to Merck's financial statement note that Merck has goodwill of $1.1 billion. Where does recorded goodwill come from? Is it necessarily a good thing to have a lot of goodwill on a company's books?

Case 2: Analysis of Goodwill

As a new intern for the local branch office of a national brokerage firm, you are excited to get an assignment that allows you to use your accounting expertise. Your supervisor provides you the spreadsheet below, which contains data for the most recent quarter for three companies that the firm has been recommending to its clients as "buys". Each of the companies' returns on assets has outperformed their industry cohorts in the past. But, given recent challenges and lower earnings. (All number in millions, except return on assets.)

Company	Fair value of company	Book Value	Carrying value of goodwill	Return on assets
Sprint Nextel	$36,361	$51,271	$30,718	3.5%
Washington Mutual	11,742	23,941	9,062	2.4%
E* Trade Financial	1,639	4,104	2,035	5.6%

Instruction:

1. The fair value of each of these companies is lower than the corresponding book value. What implication does this have for each company's future prospects?

2. To date, none of these companies has recorded goodwill impairments. Your supervisor suspects that they need to record impairments in the near future, but he is unsure about the goodwill impairment rules. Is it likely that these companies will recognize impairments? Explain.

3. Estimate the amount of goodwill impairment for each company and prepare the journal entry to record the impairment. For each company, you may assume that the book value less than the carrying value of the goodwill approximate the fair value of the companies' net assets.

4. Discuss the effects of your entries in part (3) on your evaluation of these companies based on the return on asset ratio?

Reference no: EM13787227

Questions Cloud

Kinds of business relationships/financing arrangements : Identify three creative kinds of business relationships/financing arrangements that can be used to help manage cash in a small firm.

Notes about evolving law enforcement : 3 slide power point with speaker notes about Evolving Law Enforcement and Forensic Technologies. Evolving law enforcement and forensic technologies used to detect criminal activities

Provide advantage and disadvantage of piece of legislation : Provide at least one advantage and one disadvantage of each piece of legislation.

In what ways is dorine a unique presence there : What role does Dorine play in the household? In what ways is she a unique presence there? Describe the play's setting, tone, style, and theme/s.

Financial statement analysis cases : Merck & Co., Inc. and Johnson & Johnson are two leading producers of health care products. Each has considerable assets, and each expends considerable funds each year toward the development of new products.

Report to the judge on the inmates progress in prison : Your obligation to this case is to write a report to the judge on the inmate's progress in prison. The inmate is eligible for early release because of good behavior. Bound by physician-client privilege, you know that this cannot be discussed with ..

Create a fictional organization : You need to create a fictional organization (or a real one) for which you will give a presentation. You should describe the organization in detail, providing necessary information such as the size of the organization, type of organization, where t..

Identify and describe kohlberg''s stages of moral development : Identify and describe Kohlberg's three stages of moral development and explain how each stage applies to your own personality formation.

Risk management in new technology deployment projects : Write a Dissertation on "Risk management in new technology deployment projects"

User Account

All Pages