Accounting -Cengage Learning and McGraw Hill are major textbook publishers

| January 30, 2017

Question
Cengage Learning and McGraw Hill are major textbook publishers. Cengage Learning has been experiencing severe financial hardship, leading some to it filing for chapter 11 bankruptcy protection on June 25, 2013. This is not the case with McGraw Hill, a competitor of Cengage Learning.

This project will consist of preparing two reports.

Report 1: a comparative financial analysis of Cengage Learning and McGraw Hill, for the years 2011 – 2013. What you will do is use analytical techniques to evaluate the relative financial health of both of these organizations. Will your analysis show that Cengage was in greater financial trouble? We’ll see.

The benefit of this analysis is to expose you to analytical techniques that will be useful in assessing the financial health of businesses. Industry averages are available to compare analyses with, but for this project all you need do is compare Cengage Learning with McGraw Hill. You will be given instructions by chapter on the analyses to be performed. Your finished product is to be typed, logical, and easy to follow. Be careful not to have analyses split inappropriately by page breaks. Your final report should have all detailed analyses you are instructed to do, with an assessment made after each comparative analysis. Also, a summary is to be prepared, giving your final judgment of the relative financial health of Cengage Learning and McGraw Hill, giving reasons for your conclusion regarding the relative strengths of each organization. Your analyses are to be to the point and brief, easy to follow and understand.

Report 2: a report on various disclosures in the 2013 McGraw Hill annual report. Please only refer to the 2013 annual report when answering questions for this part of the assignment. Questions will be posted weekly. You will be examining the financial statements (balance sheet, income statement, statement of shareholders’ equity, and statement of cash flows) and the footnotes following those financial statements. You need not refer to any other material in the annual report. Your answers are to be typed, immediately below the question asked. They should be easy to understand and follow. They should not consist of numbers, alone. For example, if asked “What was the total current assets for McGraw Hill?” your answer should not simply be $2,936 million, instead your answer should be “Current assets for McGraw Hill for 2013 was $2,938 million, as reported on page 36.” Include the page number from which the information was obtained.

Begin your paper with an executive summary of conclusions derived from Report 1. This executive summary is to be no longer than 1 page.

Both reports are to be prepared in one word document

Question 1

Report 1, Financial Analysis Questions (I suggest you print out the income statements, the statements of shareholders’ equity, the balance sheets, and the statements of cash flows for both businesses, for all years 2011 – 2013.

For both businesses, for the years 2011 – 2013, perform a trend analysis on Sales, Cost of sales, and gross margin (if gross margin is not shown, it is sales – cost of sales). The trend analysis shows the percentage change from year to year of the items. The formula I use for yearly change is (y2 – y1)/y1. Compare Cengage Learning and McGraw Hill performances based on this analysis.
Report 2, Financial Report Questions (For this report, you will need the financial statements and footnotes following the financial statements, and nothing else, for McGraw Hill 2013 annual report). Only McGraw Hill and 2013, nothing else.

Chapter 1 Questions

What are the beginning and ending page numbers beginning with the first financial statement shown and ending with the final footnote following the financial statements?
The purpose of footnotes is to explain and clarify items shown on the financial statements. Please list the number and name of each of the footnotes, as well as the page the footnote appears. For instance, the first footnote following the financial statements is usually named “Summary of significant accounting policies.”
Question 2

Report 2, Financial Analysis Questions /Chapter2

Solvency. For both businesses, for the years 2011 – 2013, compute the Current Ratio (p332 of textbook). Give the definition of the current ratio, and state which of the two businesses appear stronger with respect to this ratio, and why.
Solvency. For both businesses, for the years 2011 – 2013, compute the Quick Ratio (p332 of textbook). Give the definition of the quick ratio, and state which of the two businesses appear stronger with respect to this ratio, and why.
Solvency. For both businesses, for the years 2011 – 2013, compute the Ratio of Liabilities to Stockholder’s Equity (p337 of textbook). Give the definition of this ratio, and state which of the two businesses appear stronger with respect to this ratio, and why.
Profitability. For both businesses, for the years 2011 – 2013, compare net incomes (or net losses). State which of the two businesses appear stronger with respect to this item, and why.
Profitability. For both businesses, for the years 2011 – 2013, compare basic earnings per share (given at the bottom of the income statement). State which of the two businesses appear stronger with respect to EPS, and why.
Report 2, Financial Report Questions (For this report, you will need the financial statements and footnotes following the financial statements, and nothing else, from McGraw Hill’s 2013 annual report). Only McGraw Hill and 2013, nothing else.

No questions for chapter 2.
Question 3

Report 1, Financial Analysis Questions /Chapter 3

No questions from chapter 3.
Report 2, Financial Report Questions (For this report, you will need the financial statements and footnotes following the financial statements, and nothing else, from McGraw Hill’s 2013 annual report). Only McGraw Hill and 2013, nothing else.

Describe McGraw Hill’s revenue recognition policy (this is usually in the first footnote, Summary of Significant Accounting Policies).
Does McGraw Hill have any unearned revenues? Please describe what, in your opinion, constitutes this item (also sometimes referred to as deferred revenues

Question 4

Report 1, Financial Analysis Questions/ Chapter 4-6

A buildup of inventories sometimes indicates the business is not generating sales that it hoped to. Prepare a trend analysis of inventories for both businesses from 2011 – 2013. Draw conclusions.
Compute the inventory turnover (p335) and days’ sales in inventory (p336) for both businesses from 2012 – 2013. Draw conclusions.
Compute the accounts receivable turnover (p334) and days’ sales in receivables (p334) for both businesses from 2012 – 2013. Please note; an alternative formula for days’ sales in receivables, that I prefer, is (360/AR turnover). Draw conclusions.
Question 5

Report 1, Financial Analysis Questions /Chapter 7

For 2012 – 2013 compute the rate earned on total assets (p339). Draw conclusions.
Report 2, Financial Report Questions (For this report, you will need the financial statements and footnotes following the financial statements, and nothing else, from McGraw Hill’s 2013 annual report). Only McGraw Hill and 2013, nothing else.

Name the dollar amounts and categories of plant and equipment. Also state the amount of accumulated depreciation.
Once you have completed the financial analysis questions, please prepare an executive summary of your conclusions regarding the relative financial health of Cengage Learning and McGraw Hill over the time period analyzed. The executive summary should be at the front of your report.(The textbook is The survey of accounting by Carl)

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