Peyton Enterprises

Financial Reporting Analysis

Rashid Ali Shah

25-Apr-17

Submitted to: Mr sajjad Ahmed

Section: MBA case study(a)
Overview of case

Peyton case discussed regarding the accounting policies, which used in company. The Company
using aggressive method to show more profit in income statement. The case focuses on three
basic accounting topics-LIFO inventory reserves, the allowance for doubtful accounts, and
depreciation policies and assumptions-that span the range of earnings management
considerations. The Peyton management wants to change accounting policies and want use to
conservatism policy which shows higher expense and less income in income statement. Develop
an understanding of different possible concessions, management want to launch IPO to show
stronger position of company to attract more investors towards peyton enterprises.

Company overview

Peyton specialty to design manufacture equipment and component product used in chemical
industries. It has been operating since 1947, has had a strong reputation as a reliable and
affordable product filtration supplier throughout the United States. New CEO of Peyton is
McNeilly, who was just employed six months ago and came with an impressive record of
executive leadership and financial planning was Berry. Berry was very aggressive with policies
in light of the company's recent negative performance. It showed that any incitement to revenue
from the crazy accounting decision under her watch "simply would not happen"

The competitor of peyton enterprise is (general electric, and Pall Corporation) and
smaller companies. Different chemical companies used as sole supplier of Peyton enterprises and
some companies made contract of 10 years with Peyton enterprises.

NEW CEO McNilly

McNilly was hired to help turn the company back to growing profitability her
compensation consisted with salary plus promise of cash bonus based upon Peyton ROA, earning
growth and successful IPO. IPO would raise capital to fuel the expected future growth in life
science sector and would facilitate the implementation of share based compensation scheme for
senior management and lower level of employee. She proposed three strategies given below

1, the last year allowance for doubtful account for 2013 dropped 2.5% McNilly wanted to see 4.5
% in 2014 about current affairs of financial statement. Increase in next year increase from 2.5 to
4.5 of allowance doubtful accounts. She is risk averse to manage bad debts as account
receivable increase.

2, McNilly viewed don’t slow down inventory because a slowdown in purchase created
inventory supply risk.

3, McNally flatly proposed to reduce average useful life from five to seven year or switching
from straight line method to DDM. She wants to recover cost in shorter period to manage risk.
Issues in case

1. Sales growth slowed.

2. Difficulties in controlling costs.
3. Reduction in demand for goods due to reduced use of coal.
4. IPO Was delayed due to the less market shareholder
5. Inventory slow down
April, 2015 Berry asked Stan Emmott, company controller of the company's accounting policies
Emmott receivable, inventory, and fixed assets, the company was aware of account’s have to
look at what went. Emmott then to take care of solving the above problems and Barry McNeilly
accounting methods and assumptions a company is currently following. He decided to change
some of their accounting methods. The company management doesn’t maintain its inventory and
accounts receivables. The recovery management of company is not good because there was
problem of allowance for doubtful accounts and recovery of accounts receivable.

ANS Income Statement

of Peyton enterprise
2014 2013 2012
Sales 2462171 3040570 2677547
COGS 1779209 2134007 1887692
GP 682962 906563 789855
SG&A 506563 579292 521699
Operating
Income 176399 327271 268156
Net
Fiancing
cost 1417 1570 532
other
Expanes 3431 3578 3793
EBIT 171551 322123 263831
Taxes 60043 112743 92341
NI 111508 209380 171490

Ratios analysis

2013 2014
Sales % 14% -19%
COGS% 70% 72%
GP% 30% 28%
S&GA% 64% 74%
 OI% 36% 26%
TAXES 35% 35%
NI PER
Sales 7% 5%

The sale of company decrease in 2014 by 19% .its shows company is not performing well
because business of companies pull down . It’s horrible moment for company to grow. Cost of
goods sold also increase even sale is decreasing. Gross profit also decreases in 2014 as compare
to 2013. Net profit goes down in 2014. Even company wants to launch new share in market to
attract investor. How investor attract when profit not high as previous years.

Balance sheet Analysis

2014 2013
Cash 73164 78442
A/R 329880 302043
Inventories 281417 218506
Others 52819 41155
TCA 737280 640146
PPE 268630 254103
Intangible 91267 84840
Good Wil 106849 106849
TA 1204026 1085938
Libilites
A/P 136575 125890
other
Current 45426 46130
TCL 182001 172020
pension 10919 19750
other LD 26272 24133
TL 219192 215903
Share
Holder eq
CS 163893 163893
RE 824362 712854
AOC -3421 -4569
TSE 984834 872178
Total 1204026 1088081
 Ratios

2014 2013
Liquaidity
Ratios
CR 4.050967 3.721346
Quick RA 2.504728 2.45111
NWC RA 0.461185 0.43108

Protifibility
Analysis
RoA 9% 19%
ROE 11% 24%
EPS 0.680371 1.277541

Assest
Turnover 2.044948 2.799948
AR
Turnover 7.463838 10.06668
ITO 6.322322 9.766354

Capitial
Structure
Debt to
Equity 22% 25%

Debt to
allowance 3% 4%

Current ratio of company increasing by 4.050967 in 2014 as compare to3.721346 2013 its show
accounts receivable is stuck towards customer. Inventory is slowdown. Profitability of company
also low due to low sale in 2014. Return on asset also decrease by 13% in 2014.

There are two accounting Practices

1. Conservative Accounting Practices:
Conservative requires a high degree of verification before making a legal claim to any
profit as it requires recognition of all probable losses as they are discovered and most
expenditure as they are incurred. Revenue will be deferred until it is verified as strict
revenue-recognition criteria is one of the most common forms of accounting
 conservatism. An example of accounting conservatism — overestimating an allowance
for doubtful accounts — can give a more accurate picture of
recoverable receivables given a specific economic outlook.

When following accounting conservatism guidelines, assets and revenue are

intentionally reported at figures potentially understated. Liabilities and expenses are
overstated when using conservative accounting. Therefore, accounting conservatism
will always report lower net income and lower financial future benefits.

Aggressive Accounting Practices

 Lengthening asset lives (will reduce depreciation charge)

 Using straight line depreciation (lower depreciation in earlier years)
 Choosing FIFO as opposed to LIFO accounting for inventory in an inflationary
environment (this leads to ending inventory being higher from lower COGS,
and higher operating profit)
 Insufficient acquisition disclosures.
 Capitalisation of operating costs (this can be fraudulent – Anything that doesn’t
lead to future economic benefits must be expensed)
 Recording investment income as revenue (Think: is management masking a
decline in sales?)

 Recording revenue prematurely (percentage of completion incorrectly used, bill

and hold).

Conclusion

Company should used aggressive approach to gain investor interest. Its show high income, it will
boost the confidence of investor. Inversely of aggressive approach, conservatism its lower
income of due to more cost, while using LIFO and double declining method and more allowance
for doubtful account of receivables, it less attractive to investors due to profit . investor nature is
to maximize the profits.